UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
or
For the transition period from ____________ to ___________
Commission File Number
(Exact Name of Registrant as Specified in Its Charter)
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
| (Address of Principal Executive Offices) | (Zip Code) |
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| N/A | N/A | N/A |
Indicate by check mark whether
the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Indicate by check mark whether
the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
| Large accelerated filer ☐ | Accelerated filer ☐ | |
| Smaller reporting Company | ||
| Emerging growth Company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Act. ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.
| Number of Shares | Class: | As of: | ||
| Common Stock $0.001 par value | June 14, 2022 |
DIGERATI TECHNOLOGIES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED APRIL 30, 2022
INDEX
i
DIGERATI TECHNOLOGIES, INC.
CONTENTS
ii
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIGERATI TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, unaudited)
| April 30, | July 31, | |||||||
| 2022 | 2021 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Prepaid and other current assets | ||||||||
| Total current assets | ||||||||
| LONG-TERM ASSETS: | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Property and equipment, net | ||||||||
| Other assets | ||||||||
| Investment in Itellum | ||||||||
| Right-of-use asset | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Equipment financing | ||||||||
| Convertible note payable, current, net $ | ||||||||
| Note payable, current, related party, net $ | ||||||||
| Note payable, current, net $ | ||||||||
| Acquisition payable | ||||||||
| Deferred income | ||||||||
| Derivative liability | ||||||||
| Operating lease liability, current | ||||||||
| Total current liabilities | ||||||||
| LONG-TERM LIABILITIES: | ||||||||
| Convertible note payable | - | |||||||
| Notes payable, related party, net $ | ||||||||
| Note payable, net $ | ||||||||
| Operating lease liability | ||||||||
| Total long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| STOCKHOLDERS’ DEFICIT: | ||||||||
| Preferred stock, $ | ||||||||
| Convertible Series A Preferred stock, $ | ||||||||
| Convertible Series B Preferred stock, $ | ||||||||
| Convertible Series C Preferred stock, $ | ||||||||
| Series F Super Voting Preferred stock, $ | ||||||||
| Common stock, $ | ||||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Other comprehensive income | ||||||||
| Total Digerati’s stockholders’ deficit | ( | ) | ( | ) | ||||
| Noncontrolling interest | ( | ) | ( | ) | ||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and stockholders’ deficit | $ | $ | ||||||
See accompanying notes to consolidated unaudited financial statements
1
DIGERATI TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts, unaudited)
| Three months ended April 30, | Nine months ended April 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| OPERATING REVENUES: | ||||||||||||||||
| Cloud software and service revenue | $ | $ | $ | $ | ||||||||||||
| Total operating revenues | ||||||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Cost of services (exclusive of depreciation and amortization) | ||||||||||||||||
| Selling, general and administrative expense | ||||||||||||||||
| Legal and professional fees | ||||||||||||||||
| Bad debt expense | ||||||||||||||||
| Depreciation and amortization expense | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| OPERATING LOSS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER INCOME (EXPENSE): | ||||||||||||||||
| Gain (loss) on derivative instruments | ( | ) | ( | ) | ||||||||||||
| Loss on extinguishment of debt | ( | ) | ||||||||||||||
| Gain on settlement of debt | ||||||||||||||||
| Income tax benefit (expense) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense) | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other income (expense) | ( | ) | ( | ) | ( | ) | ||||||||||
| NET INCOME (LOSS) INCLUDING NONCONTROLLING INTEREST | ( | ) | ( | ) | ( | ) | ||||||||||
| Less: Net loss attributable to the noncontrolling interests | ||||||||||||||||
| NET INCOME (LOSS) ATTRIBUTABLE TO DIGERATI’S SHAREHOLDERS | ( | ) | ( | ) | ( | ) | ||||||||||
| Deemed dividend on Series A Convertible preferred stock | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| NET INCOME (LOSS) ATTRIBUTABLE TO DIGERATI’S COMMON SHAREHOLDERS | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| INCOME (LOSS) PER COMMON SHARE - BASIC | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| LOSS PER COMMON SHARE - DILUTED | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC | ||||||||||||||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED | ||||||||||||||||
See accompanying notes to consolidated unaudited financial statements
2
DIGERATI TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
For the Nine Months Ended April 30, 2021
(In thousands, except for share amounts, unaudited)
| Equity Digerati’s Shareholders | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Convertible | Common | Additional | Other | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series A Shares | Par | Series B Shares | Par | Series C Shares | Par | Series F Shares | Par | Shares | Par | Paid-in Capital | Accumulated Deficit | Comprehensive Income | Stockholders’ Deficit | Noncontrolling Interest | Totals | |||||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE, July 31, 2020 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of employee stock options | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for services, to employees | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for services | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for debt conversion | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued concurrent with convertible debt | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Beneficial conversion feature on convertible debt | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Derivative liability resolved to APIC due to note conversion | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared | - | - | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Ioss | - | - | - | - | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE, October 31, 2020 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of employee stock options | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for settlement of accounts payable | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for debt conversion | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued concurrent with convertible debt | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Beneficial conversion feature on convertible debt | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Derivative liability resolved to APIC due to note conversion | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared | - | - | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Ioss | - | - | - | - | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE, January 31, 2021 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of employee stock options | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock Series B issued for debt settlement | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock Series C issued for debt settlement | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for debt conversion | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued concurrent with convertible debt | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for services | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for exercise of warrants | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Beneficial conversion feature on convertible debt | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared | - | - | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Loss | - | - | - | - | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE, April 30, 2021 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
See accompanying notes to consolidated unaudited financial statements
3
DIGERATI TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
For the Nine Months Ended April 30, 2022
(In thousands, except for share amounts, unaudited)
| Equity Digerati’s Shareholders | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Convertible | Common | Additional | Other | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series A Shares | Par | Series B Shares | Par | Series C Shares | Par | Series F Shares | Par | Shares | Par | Paid-in Capital | Accumulated Deficit | Comprehensive Income | Stockholders’ Deficit | Noncontrolling Interest | Totals | |||||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE, July 31, 2021 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of employee stock options | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued concurrent with convertible debt | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared | - | - | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Loss | - | - | - | - | - | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE, October 31, 2021 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of employee stock options | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued concurrent with convertible debt | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared | - | - | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Ioss | - | - | - | - | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE, January 31, 2022 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of employee stock options | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for debt extension | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Derivative liability resolved to APIC due to note payoff | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared | - | - | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | - | - | - | - | - | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE, April 30, 2022 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
See accompanying notes to consolidated unaudited financial statements
4
DIGERATI TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
| Nine months ended April 30, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to cash (used in)/provided by operating activities: | ||||||||
| Depreciation and amortization expense | ||||||||
| Stock compensation and warrant expense | ||||||||
| Bad debt expense | ||||||||
| Amortization of ROU Asset | ||||||||
| Amortization of debt discount | ||||||||
| (Gain) on derivative liabilities | ( | ) | ||||||
| Loss on extinguishment of debt | ||||||||
| (Gain) on settlement of debt | ( | ) | ||||||
| Shares issued for debt extension charged to interest expense | ||||||||
| Debt extension fee charged to interest expense | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Other assets | ||||||||
| Right of use operating lease liability | ( | ) | ( | ) | ||||
| Accounts payable | ||||||||
| Accrued expenses | ||||||||
| Deferred income | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Cash paid in acquisition of equipment | ( | ) | ( | ) | ||||
| Proceeds from Nexogy | ||||||||
| Acquisition of VoIP assets, net of cash received | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Borrowings from convertible debt, net of original issuance cost and discounts | ||||||||
| Proceed from the exercise of warrants | ||||||||
| Borrowings from debt, net of original issuance cost and discounts | ||||||||
| Principal payments on debt, net | ( | ) | ||||||
| Principal payments on convertible notes, net | ( | ) | ( | ) | ||||
| Principal payments on related party notes, net | ( | ) | ( | ) | ||||
| Principal payment on equipment financing | ( | ) | ( | ) | ||||
| Net cash provided by financing activities | ||||||||
| INCREASE IN CASH AND CASH EQUIVALENTS | ||||||||
| CASH AND CASH EQUIVALENTS, beginning of period | ||||||||
| CASH AND CASH EQUIVALENTS, end of period | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURES: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Income tax paid | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES | ||||||||
| Accrued interest rolled into principal | $ | $ | ||||||
| Incentive earnout adjustment on Active PBX acquisition | $ | $ | ||||||
| Stock issued with convertible debt - debt discount | $ | $ | ||||||
| Beneficial conversion feature on convertible debt | $ | $ | ||||||
| Preferred Stock Series B issued for debt conversion | $ | $ | ||||||
| Preferred Stock Series C issued for debt conversion | $ | $ | ||||||
| Derivative liability resolved to APIC | $ | $ | ||||||
| Debt discount from derivative liabilities | $ | $ | ||||||
| Promissory note reclassed to convertible debt | $ | $ | ||||||
| Capitalization of ROU assets and liabilities - operating | $ | $ | ||||||
| Common Stock issued for debt conversion | $ | $ | ||||||
| Common Stock issued for accounts payable | $ | $ | ||||||
| Dividend declared | $ | $ | ||||||
See accompanying notes to consolidated unaudited financial statements
5
DIGERATI TECHNOLOGIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements of Digerati Technologies, Inc. (“we;” “us,” “our,” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the United States Securities and Exchange Commission. In the opinion of management, these interim financial statements contain all adjustments, consisting of normal recurring adjustments necessary for a fair presentation of financial position and the results of operations for the interim periods presented. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the consolidated financial statements, which would substantially duplicate the disclosure contained in the audited consolidated financial statements for the year ended July 31, 2021, contained in the Company’s Form 10-K filed on October 26, 2021 have been omitted.
Earnings (Loss) Per Share
Basic and diluted earnings (loss) per share is computed by dividing loss attributable to common stockholders by the weighted average number of shares of Common Stock outstanding during the period. Basic earnings (loss) per share is computed by dividing the net income (loss) available to common stockholders by the weighted-average number of shares of Common Stock outstanding during the respective period presented in the Company’s accompanying condensed consolidated financial statements. Fully-diluted earnings (loss) per share is computed similarly to basic income (loss) per share except that the denominator is increased to include the number of dilutive Common Stock equivalents using the treasury stock method for options and warrants and the if-converted method for convertible debt.
| Three months ended April 30, | Nine months ended April 30, | |||||||||||||||
| (in thousands, except per share data) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| NUMERATOR: | ||||||||||||||||
| NET INCOME (LOSS) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| DENOMINATOR: | ||||||||||||||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC | ||||||||||||||||
| INCOME (LOSS) PER COMMON SHARE - BASIC | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Three months ended April 30, | Nine months ended April 30, | |||||||||||||||
| (in thousands, except per share data) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| NUMERATOR: | ||||||||||||||||
| NET INCOME (LOSS) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Less: adjustments to net income | $ | ( | ) | $ | $ | $ | ||||||||||
| NET INCOME (LOSS) - DILUTED SHARES OUTSTANDING CALCULATION | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| DENOMINATOR: | ||||||||||||||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC | ||||||||||||||||
| Warrants and Options to purchase common stock | ||||||||||||||||
| Convertible Debt | ||||||||||||||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED | ||||||||||||||||
| LOSS PER COMMON SHARE - DILUTED | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
The Company excluded the following securities from the calculation of basic and diluted net loss per share as the effect would have been antidilutive
| Three months ended April 30, | Nine months ended April 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Convertible Preferred Shares | ||||||||||||||||
| Convertible Debt | ||||||||||||||||
| Total | ||||||||||||||||
6
Treasury Shares
Customers and Suppliers
We rely on various suppliers to provide services in connection with our VoIP and UCaaS offerings. Our customers include businesses in various industries including Healthcare, Banking, Financial Services, Legal, Real Estate, and Construction. We are not dependent upon any single supplier or customer.
During the nine months ended April 30, 2022, and 2021, the Company did not derive revenues of 10% or more from any single customer.
As of April 30, 2022, and 2021, the Company did not have outstanding accounts receivable of 10% or more from any single customer.
Sources of revenue:
Cloud-based hosted Services. The Company recognizes cloud-based hosted services revenue, mainly from subscription services for its cloud telephony applications that includes hosted IP/PBX services, SIP trunking, call center applications, auto attendant, voice, and web conferencing, call recording, messaging, voicemail to email conversion, integrated mobility applications that are device and location agnostic, and other customized applications. Other services include enterprise-class data and connectivity solutions through multiple broadband technologies including cloud WAN or SD-WAN (Software-defined Wide Area Network), fiber, and Ethernet over copper. We also offer remote network monitoring, data backup and disaster recovery services. The Company applies a five-step approach in determining the amount and timing of revenue to be recognized: (1) identifying the contract with a customer, (2) identifying the performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations in the contract and (5) recognizing revenue when the performance obligation is satisfied. Substantially all of the Company’s revenue derived from cloud-based hosted services is recognized at the time control of the products transfers to the customer.
Service Revenue
Service revenue from subscriptions to the Company’s cloud-based technology platform is recognized over time on a ratable basis over the contractual subscription term beginning on the date that the platform is made available to the customer. Payments received in advance of subscription services being rendered are recorded as deferred revenue. Usage fees, either bundled or not bundled, are recognized when the Company has a right to invoice. Professional services for configuration, system integration, optimization, customer training and/or education are primarily billed on a fixed-fee basis and are performed by the Company directly. Alternatively, customers may choose to perform these services themselves or engage their own third-party service providers. Professional services revenue is recognized over time, generally as services are activated for the customer.
Product Revenue
The Company recognizes product revenue for telephony equipment at a point in time, when transfer of control has occurred, which is generally upon delivery. Sales returns are recorded as a reduction to revenue estimated based on historical experience.
7
Disaggregation of Cloud software and service revenue
Summary of disaggregated revenue is as follows (in thousands):
| For the Three Months ended April 30, | For the Nine Months ended April 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Cloud software and service revenue | $ | $ | $ | $ | ||||||||||||
| Product revenue | ||||||||||||||||
| Total operating revenues | $ | $ | $ | $ | ||||||||||||
Contract Assets
Contract assets are recorded for
those parts of the contract consideration not yet invoiced but for which the performance obligations are completed. The revenue is recognized
when the customer receives services or equipment for a reduced consideration at the onset of an arrangement; for example, when the initial
month’s services or equipment are discounted. Contract assets are included in prepaid and other current assets in the consolidated balance
sheets, depending on if their reduction is recognized during the succeeding 12-month period or beyond. Contract assets as of April 30,
2022, and July 31, 2021, were $
Deferred Income
Deferred income represents billings or payment received in advance of revenue recognition and is recognized upon transfer of control.
Balances consist primarily of annual plan subscription services, for services not yet provided as of the balance sheet date. Deferred
revenues that will be recognized during the succeeding 12-month period are recorded as current deferred revenues in the consolidated balance
sheets, with the remainder recorded as other noncurrent liabilities in the consolidated balance sheets. Deferred income as of April 30,
2022, and July 31, 2021, were $
Customer deposits
The Company in some instances requires
customers to make deposits for the last month of services, equipment, installation charges and training. As equipment is installed
and training takes places the deposits are then applied to revenue. The deposit for the last month of services is applied to any
outstanding balances if services are cancelled. If the customer’s account is paid in full, the Company will refund the full
deposit in the month following service termination. As of April 30, 2022, and July 31, 2021, Digerati’s customer deposits
balance was $
Costs to Obtain a Customer Contract
Direct incremental costs of obtaining a
contract, consisting of sales commissions, are deferred, and amortized over the estimated life of the customer, which currently
averages
Direct Costs - Cloud software and service
We incur bandwidth and colocation charges in connection with our UCaaS or cloud communication services. The bandwidth charges are incurred as part of the connectivity between our customers to allow them access to our various services. We also incur costs from underlying providers for fiber, internet broadband, and telecommunication circuits in connection with our data and connectivity solutions.
8
Contingencies
The Company acts as a collection agent for various government authorities,
including but not limited to the Federal Communications Commissions (“FCC”), state authorities such as the California Public
Utilities Commission (“PUC”), and other state and local taxes including the California Utility User Tax (“UUT”).
The Company performed a review of the regulatory classification of its services and its federal and state regulatory and transactional
tax obligations and determined the Company understated its remittances. As of April 30, 2022, the Company’s outstanding aggregate
tax remittance liability, including penalties and interest, was $
Derivative financial instruments.
Digerati does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. However, Digerati evaluates its convertible instruments and free-standing instruments such as warrants for derivative liability accounting.
For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date. Any changes in fair value are recorded as non-operating, non-cash income or expense for each reporting period. For derivative notes payable conversion options and warrants Digerati uses the Black-Scholes option-pricing model to value the derivative instruments.
The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period.
Fair Value of Financial Instruments.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value hierarchy is used which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy based on the three levels of inputs that may be used to measure fair value are as follows:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.
For certain of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, the carrying amounts approximate fair value due to the short maturity of these instruments. The carrying value of our long-term debt approximates its fair value based on the quoted market prices for the same or similar issues or the current rates offered to us for debt of the same remaining maturities.
Our derivative liabilities as of April 30, 2022,
and July 31, 2021, are approximately $
9
The following table provides the fair value of the derivative financial instruments measured at fair value using significant unobservable inputs:
| Fair value measurements at reporting date using. | ||||||||||||||||
| Description | Fair Value | Quoted prices in active markets for identical liabilities (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | ||||||||||||
| Convertible promissory notes derivative liability at July 31, 2021 | $ | $ | ||||||||||||||
| Convertible promissory notes derivative liability at April 30, 2022 | $ | $ | ||||||||||||||
The fair market value of all derivatives during the year ended July 31, 2021 was determined using the Black-Scholes option pricing model which used the following assumptions:
| Expected dividend yield | ||||
| Expected stock price volatility | ||||
| Risk-free interest rate | ||||
| Expected term |
The fair market value of all derivatives during the nine months ended April 30, 2022, was determined using the Black-Scholes option pricing model which used the following assumptions:
| Expected dividend yield | ||||
| Expected stock price volatility | ||||
| Risk-free interest rate | ||||
| Expected term |
The following table provides a summary of the changes in fair value of the derivative financial instruments measured at fair value on a recurring basis using significant unobservable inputs:
| Balance at July 31, 2020 | $ | |||
| Derivative from new convertible promissory notes recorded as debt discount | ||||
| Derivative liability resolved to additional paid in capital due to debt conversion | ( | ) | ||
| Derivative loss | ||||
| Balance at July 31, 2021 | $ | |||
| Derivative from new convertible promissory notes recorded as debt discount | ||||
| Derivative liability resolved to additional paid in capital due to payoff of convertible debt | ( | ) | ||
| Derivative gain | ( | ) | ||
| Balance at April 30, 2022 | $ |
Noncontrolling interest
The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, Consolidation, which governs the accounting for and reporting of non-controlling interests (“NCIs”) in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCIs be treated as a separate component of equity, not as a liability, that increases and decreases in the parent’s ownership interest that leave control intact be treated as equity transactions rather than as step acquisitions or dilution gains or losses, and that losses of a partially owned consolidated subsidiary be allocated to the NCI even when such allocation might result in a deficit balance. The net income (loss) attributed to the NCI is separately designated in the accompanying consolidated statements of operations.
10
On May 1, 2018,
For the nine months ending April 30, 2022, and
2021, the Company accounted for a noncontrolling interest of $
Recently issued accounting pronouncements.
Recent accounting pronouncements, other than below, issued by the FASB (including its Emerging Issues Task Force), the AICPA and the SEC did not, or are not, believed by management to have a material effect on the Company’s present or future financial statements.
In August 2020, the FASB issued “ASU 2020-06, Debt with Conversion and Other Options (Subtopic 47020) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40)” which simplifies the accounting for convertible instruments. The guidance removes certain accounting models which separate the embedded conversion features from the host contract for convertible instruments. Either a modified retrospective method of transition or a fully retrospective method of transition is permissible for the adoption of this standard. Update No. 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted no earlier than the fiscal year beginning after December 15, 2020. The Company is currently evaluating the potential impact of this ASU on its financial statements.
NOTE 2 – GOING CONCERN
Financial Condition
The Company’s consolidated financial statements
for the nine months ending April 30, 2022 have been prepared on a going concern basis, which contemplates the realization of assets and
the settlement of liabilities in the normal course of business. Since the Company’s inception in 1993, the Company has incurred
net losses and accumulated a deficit of approximately $
Management Plans to Continue as a Going Concern
Management believes that available resources as of April 30, 2022 will not be sufficient to fund the Company’s operations and corporate expenses over the next 12 months. The Company’s ability to continue to meet its obligations and to achieve its business objectives is dependent upon, and other things, raising additional capital, issuing stock-based compensation to certain members of the executive management team in lieu of cash, or generating sufficient revenue in excess of costs. At such time as the Company requires additional funding, the Company will seek to secure such best-efforts funding from various possible sources, including equity or debt financing, sales of assets, or collaborative arrangements. If the Company raises additional capital through the issuance of equity securities or securities convertible into equity, stockholders will experience dilution, and such securities may have rights, preferences, or privileges senior to those of the holders of common stock or convertible senior notes. If the Company raises additional funds by issuing debt, the Company may be subject to limitations on its operations, through debt covenants or other restrictions. If the Company obtains additional funds through arrangements with collaborators or strategic partners, the Company may be required to relinquish its rights to certain technologies. There can be no assurance that the Company will be able to raise additional funds or raise them on acceptable terms. If the Company is unable to obtain financing on acceptable terms, it may be unable to execute its business plan, the Company could be required to curtail its operations, and the Company may not be able to pay off its obligations, if and when they come due.
11
We are currently taking initiatives to reduce our overall cash deficiencies on a monthly basis. During fiscal 2022 certain members of our executive management team have taken a significant portion of their compensation in common stock to reduce the depletion of our available cash. To strengthen our business, we intend to adopt best practices from our recent acquisitions and invest in a marketing and sales strategy to grow our monthly recurring revenue; we anticipate utilizing our value-added resellers and channel partners to tap into new sources of revenue streams; and we have also secured numerous agent agreements through our recent acquisitions that we anticipate will accelerate revenue growth. In addition, we will continue to focus on selling a greater number of comprehensive services to our existing customer base. Further, in an effort to increase our revenues, we will continue to evaluate the acquisition of various assets with emphasis in VoIP Services and Cloud Communication Services. As a result, during the due diligence process we anticipate incurring significant legal and professional fees.
We have been successful in raising debt and equity
capital in the past and as described in Notes 6,7 and 8. We have financing efforts in place to continue to raise cash through debt and
equity offerings. Although we have successfully completed financings and reduced expenses in the past, we cannot assure you that our
plans to address these matters in the future will be successful. On November 17, 2020, the Company and T3 Nevada (the Company’s
majority owned subsidiary), T3 Nevada’s subsidiaries (T3 Nevada and its subsidiaries, collectively, “the T3 Nevada Parties”)
entered into a credit agreement (the “Credit Agreement”) with Post Road Administrative LLC (the “Agent”) and
its affiliate Post Road Special Opportunity Fund II LLP (collectively, “Post Road”). Pursuant to the Credit Agreement, Post
Road provided T3 Nevada with a secured loan of up to $
The Company used $
On December 20, 2021, the T3 Nevada Parties and
Post Road entered into an amendment to the Credit Agreement (the “Amendment”) in connection with which T3 Nevada issued an
Amended and Restated Term Loan A Note (the “A&R Term Loan A Note”) in replacement of the Term Loan A Note. Under the First
Amendment, the Term Loan B Note principal of $
Pursuant to the First Amendment, the proceeds
of $
On February 4, 2022, the T3 Nevada Parties and
Post Road agreed that Post Road would provide T3 Nevada with a secured loan of $
The current Credit Agreement will allow the Company to continue acquiring UCaaS service providers that meet the Company’s acquisition criteria. Management anticipates that future acquisitions will provide additional operating revenues to the Company as it continues to execute on its consolidation strategy. There can be no guarantee that the planned acquisitions will close or that they will produce the anticipated revenues on the schedule anticipated by management.
The Company will continue to work with various funding sources to secure additional debt and equity financings. However, Digerati cannot offer any assurance that it will be successful in executing the aforementioned plans to continue as a going concern.
Digerati’s consolidated financial statements as of April 30, 2022, do not include any adjustments that might result from the inability to implement or execute Digerati’s plans to improve our ability to continue as a going concern.
12
NOTE 3 – INTANGIBLE ASSETS
Below are summarized changes in intangible assets at April 30, 2022, and July 31, 2021:
| Gross Carrying | Accumulated | Net Carrying | ||||||||||
| April 30, 2022 | Value | Amortization | Amount | |||||||||
| NetSapiens - license, 10 years | $ | $ | ( | ) | $ | |||||||
| Customer relationships, 5 years | ( | ) | ||||||||||
| Customer relationships, 7 years | ( | ) | ||||||||||
| Customer relationships 7 years | ( | ) | ||||||||||
| Trademarks, 7 years | ( | ) | ||||||||||
| Non-compete, 2 & 3 years | ( | ) | ||||||||||
| Marketing & Non-compete, 5 years | ( | ) | ||||||||||
| Total Definite-lived Intangible Assets | ( | ) | ||||||||||
| Goodwill | ||||||||||||
| Balance, April 30, 2022 | $ | $ | ( | ) | $ | |||||||
| Gross Carrying | Accumulated | Net Carrying | ||||||||||
| July 31, 2021 | Value | Amortization | Amount | |||||||||
| NetSapiens - license, 10 years | $ | $ | ( | ) | $ | |||||||
| Customer relationships, 5 years | ( | ) | ||||||||||
| Customer relationships, 7 years | ( | ) | ||||||||||
| Customer relationships 7 years | ( | ) | ||||||||||
| Trademarks, 7 years | ( | ) | ||||||||||
| Non-compete, 2 & 3 years | ( | ) | ||||||||||
| Marketing & Non-compete, 5 years | ( | ) | ||||||||||
| Total Definite-lived Intangible Assets | ( | ) | ||||||||||
| Goodwill | ||||||||||||
| Balance, July 31, 2021 | $ | $ | ( | ) | $ | |||||||
Total amortization expense for the nine months
ended April 30, 2022, and 2021 was $
NOTE 4 – STOCK-BASED COMPENSATION
In November 2015, the Company adopted the Digerati
Technologies, Inc. 2015 Equity Compensation Plan (the “Plan”). The Plan authorizes the grant of up to
During the nine months ended April 30, 2022, the
Company extended the expiration date on
13
During the nine months ended April 30, 2021, we issued:
The Company recognized approximately $
A summary of the stock options outstanding as of April 30, 2022, and July 31, 2021, and the changes during the nine months ended April 30, 2022, are presented below:
| Options | Weighted average exercise price | Weighted average remaining contractual term (years) | ||||||||||
| Outstanding at July 31, 2021 | $ | |||||||||||
| Granted | ||||||||||||
| Exercised | ||||||||||||
| Forfeited and cancelled | ||||||||||||
| Outstanding on April 30, 2022 | $ | |||||||||||
| Exercisable on April 30, 2022 | $ | |||||||||||
The aggregate intrinsic value (the difference between the Company’s closing stock price on the last trading day of the period and the exercise price, multiplied by the number of in-the-money options) of the 9,230,000 and 9,230,000 stock options outstanding as of April 30, 2022, and July 31, 2021, was $141,367 and $392,891, respectively.
The aggregate intrinsic value of
NOTE 5 – WARRANTS
During the nine months ended April 30, 2022, the Company did not issue any warrants.
During the nine months ended April 30, 2021, the Company issued the following warrants:
On November 17, 2020,
14
The number of Warrant Shares is adjustable to allow the holder to maintain, subject to certain share issuances that are exceptions, the right to purchase twenty-five percent (25%) of the Company’s total shares, calculated on a fully-diluted basis. The Warrant has an exercise price of $0.01 per share and the Warrant expires on November 17, 2030. Seventy-five percent (75%) of the Warrant Shares are immediately fully vested and not subject to forfeiture at any time for any reason. The remaining twenty-five percent (25%) of the Warrant Shares are subject to forfeiture based on the Company achieving certain performance targets which, if achieved, would result in twenty percent (20%) warrant coverage. If the minority shareholders of T3 Nevada convert their T3 Nevada shares into shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), the Warrant Shares percentage shall also be lowered such that when combined with the achievement of the performance targets, the warrant coverage could be reduced to fifteen percent (15%).
In connection with the issuance of the Warrant,
the three executives of the Company, Art Smith, Antonio Estrada, and Craig Clement entered into a Tag-Along Agreement (the “Tag-Along
Agreement”) whereby they agreed that the holder of the Warrant or Warrant Share will have the right to participate or “tag-along”
in any agreements to sell any shares of their Common Stock that such executives enter into. The Company also agreed, in connection with
the issuance of the Warrant and pursuant to a Board Observer Agreement (the “Board Observer Agreement”), to grant Post Road
the right to appoint a representative to the boards of directors of the Company and each of its subsidiaries to attend all board
meeting in a non-voting observer capacity. In addition, at issuance the Company recognized $
A summary of the warrants outstanding as of April 30, 2022, and July 31, 2021, and the changes during the nine months ended April 30, 2022, are presented below:
| Warrants | Weighted average exercise price | Weighted average remaining contractual term (years) | ||||||||||
| Outstanding at July 31, 2021 | $ | |||||||||||
| Granted | ||||||||||||
| Exercised | ||||||||||||
| Forfeited and cancelled | ( | ) | $ | |||||||||
| Outstanding on April 30, 2022 | $ | |||||||||||
| Exercisable on April 30, 2022 | $ | |||||||||||
The aggregate intrinsic value (the difference
between the Company’s closing stock price on the last trading day of the period and the exercise price, multiplied by the number
of in-the-money warrants) of the
The aggregate intrinsic value of
Warrant expense for the nine months ended April
30, 2022, and 2020 were $
For the nine months ended April
30, 2022,
15
NOTE 6 – NOTES PAYABLE NON-CONVERTIBLE
On October 22, 2018, the Company issued a secured
promissory note for $
Credit Agreement and Notes
On November 17, 2020, T3 Nevada (a majority owned subsidiary of the
Company) and T3 Nevada’s subsidiaries (T3 Nevada and its subsidiaries, collectively, “the T3 Nevada Parties”) entered
into a credit agreement (the “Credit Agreement”) with Post Road Administrative LLC (the “Agent”) and its affiliate
Post Road Special Opportunity Fund II LLP (collectively, “Post Road”). The Company is a party to certain sections of the Credit
Agreement. Pursuant to the Credit Agreement, Post Road will provide T3 Nevada with a secured loan of up to $
During the nine months ended April 30, 2022, the
Company amortized $
Term Loan A Note has maturity dates of November 17, 2024, and an interest rate of LIBOR (with a minimum rate of 1.5%) plus twelve percent (12%). Term Loan A is non-amortized (interest only payments) through the maturity date and contains an option for the Company to pay interest in kind (PIK) for up to five percent (5%) of the interest rate in year one, four percent (4%) in year two and three percent (3%) in year three.
On December 20, 2021, T3 Nevada and Post Road
entered into an amendment to the Credit Agreement (the “Amendment”) in connection with which T3 Nevada issued an Amended and
Restated Term Loan A Note (the “A&R Term Loan A Note”) in replacement of the Term Loan A Note. Under the First Amendment,
the Term Loan B Note principal of $
Pursuant to the First Amendment, the additional proceeds of $
The A&R Term Loan A Note has maturity dates
of November 17, 2024, and an interest rate of LIBOR (with a minimum rate of
On February 4, 2022, the T3 Nevada Parties and Post Road agreed that
Post Road would provide T3 Nevada with a secured loan of $
16
The Term Loan C Note has a maturity date of August
4, 2023, and an interest rate of LIBOR (with a minimum rate of
The Credit Agreement contains customary representations, warranties, and indemnification provisions. The Credit Agreement also contains affirmative and negative covenants with respect to operation of the business and properties of the loan parties as well as financial performance. Below are key covenants requirements, (measured quarterly):
| 2. | Minimum Allowed - EBITDA of $3,696,175 |
| 3. | Minimum Allowed - Liquidity of $2,000,000 |
| 4. | Maximum Allowed - Capital Expenditures of $94,798 (Quarterly) |
| 5. | Minimum Allowed - Fixed Charge Coverage Ratio of 1.5 to 1.00 |
On June 13, 2022, the lender agreed to forbear the financial covenants that were not complied with during the quarter ending April 30, 2022.
T3 Nevada’s obligations under the Credit Agreement are secured
by a first-priority security interest in all of the assets of T3 Nevada and guaranteed by the other subsidiaries of the Company pursuant
to the Guaranty and Collateral Agreement, dated November 17, 2020, subsequently amended on December 31, 2021, and February 4, 2022, by
and among T3 Nevada, T3’s Nevada’s subsidiaries, and the Agent (the “Guaranty and Collateral Agreement”). In addition,
T3 Nevada’s obligations under the Credit Agreement are, pursuant to a Pledge Agreement (the “Pledge Agreement”), secured
by a pledge of a first priority security interest in T3 Nevada’s
Promissory Notes – Next Level Internet Acquisition
On February 4, 2022, as per the acquisition of Next Level Internet,
Inc. (“Next Level” or “NLI”), the Company entered into two unsecured promissory notes (the “Unsecured Adjustable
Promissory Notes”) for $
NOTE 7 – RELATED PARTY TRANSACTIONS
During the nine months ended April 30, 2022, and
2021, the Company provided VoIP Hosted and fiber services to a company owned by one of the Board members of T3 Communications, Inc., a
Florida corporation, for $
On November 17, 2020, as a result of the of the
acquisition of ActiveServe’s asset, the two sellers became related parties as they continued to be involved as consultants to manage
the customer relationship, the Company paid on an annual basis $
On December 31, 2021, as a result of the of the acquisition of Skynet
Telecom LLC’s assets, the two sellers became related parties as they continued to be involved as consultants for 12 months to manage
the customer relationship, the Company will pay on an annual basis $
17
Acquisition Payable – Skynet
As part of the acquisition of Skynet Telecom LLC’s
assets, the Company will pay to the Sellers $
NOTE 8 – CONVERTIBLE NOTES PAYABLE
As of April 30, 2022, and July 31, 2021, convertible notes payable consisted of the following:
| April 30, | July 31, | |||||||
| CONVERTIBLE NOTES PAYABLE NON-DERIVATIVE | 2022 | 2021 | ||||||
| On October 13, 2020, the Company entered into a variable convertible promissory note with an aggregate principal amount of $330,000, annual interest rate of 8% and an original maturity date of October 13, 2021, the maturity date was extended until December 15, 2021, and subsequently the maturity date was extended until July 31, 2022. After payment of transaction-related expenses and closing fees of $32,000, net proceeds to the Company from the Note totaled $298,000. The Company recorded $32,000 as a discount to the Note and amortized over the term of the note. In connection with the execution of the note, the Company issued 1,000,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $45,003 as debt discount, and it will be amortized to interest expense during the term of the promissory note. Additionally, the Company recognized $134,423 as debt discount for the intrinsic value of the conversion feature, and it will be amortized to interest expense during the term of the promissory note. The Company analyzed the Note for derivative accounting consideration and determined that since the note has a fix conversion price at issuance, it does not require to be accounted as a derivative instrument. The Company will evaluate every reporting period and identify if any default provisions and other requirements triggered a variable conversion price and if the note needs to be classified as a derivative instrument. The Company amortized $17,620 as interest expense during the nine months ended April 30, 2022. The total unamortized discount on the Note as of April 30, 2022, and July 31, 2021, were $0 and $17,620, respectively. The total principal balance outstanding as of April 30, 2022 and July 31, 2021 was $165,000. (See below variable conversion terms No.1) | $ | $ | ||||||
| On January 27, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $250,000, annual interest rate of 8% and a maturity date of January 27, 2022. In connection with the execution of the note, the Company issued 500,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $24,368 as debt discount, and it will be amortized to interest expense during the term of the promissory note. Additionally, the Company recognized $44,368 as debt discount for the intrinsic value of the conversion feature, and it will be amortized to interest expense during the term of the promissory note. The Holder may elect to convert up to 100% of the principal amount outstanding and any accrued interest on the Note into Common Stock at any time after 180 days of funding the Note. The Conversion Price shall be the greater of $0.05 or 75% of the lowest daily volume weighted average price (“VWAP”) for the ten (10) trading day period immediately preceding the conversion date. The Holder shall, in its sole discretion, be able to convert any amounts due hereunder at a twenty-five percent (25%) discount to the per share price of the Qualified Uplisting Financing. The Company analyzed the Note for derivative accounting consideration and determined that since the note has a conversion price floor, it does not require to be accounted as a derivative instrument. The Company will evaluate every reporting period and identify if any default provisions and other requirements triggered a variable conversion price and if the note needs to be classified as a derivative instrument. On January 27, 2022, the lender agreed to extend the maturity date until July 31, 2022. In connection with the extension of the maturity date on the note, the Company agreed to increase the principal balance by $25,000. The Company evaluated the amendment and accounted for these changes as an extinguishment of debt. As of amendment date, the total unamortized discount on the Note was $0. The Company recognized a loss on extinguishment of debt of $25,000 and charged to interest expense at the time of the extension. The Company amortized $34,368 as interest expense during the nine months ended April 30, 2022. The total unamortized discount on the Note as of April 30, 2022 and July 31, 2021, were $0 and $34,368, respectively. The total principal balance outstanding as of April 30, 2022 and July 31, 2021, were $275,000 and $250,000, respectively. | ||||||||
18
| April 30, | July 31, | |||||||
| CONVERTIBLE NOTES PAYABLE NON-DERIVATIVE | 2022 | 2021 | ||||||
| On April 14, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $250,000, annual interest rate of 8% and a maturity date of April 14, 2022. In connection with the execution of the note, the Company issued 500,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $63,433 as debt discount, and it will be amortized to interest expense during the term of the promissory note. Additionally, the Company recognized $96,766 as debt discount for the intrinsic value of the conversion feature, and it will be amortized to interest expense during the term of the promissory note. The Holder may elect to convert up to 100% of the principal amount outstanding and any accrued interest on the Note into Common Stock at any time after 180 days of funding the Note. The Conversion Price shall be the greater of $0.15 or 75% of the lowest daily VWAP for the ten (10) trading day period immediately preceding the conversion date. The Company analyzed the Note for derivative accounting consideration and determined that since the note has a conversion price floor, it does not require to be accounted as a derivative instrument. The Company will evaluate every reporting period and identify if any default provisions and other requirements triggered a variable conversion price and if the note needs to be classified as a derivative instrument. On April 14, 2022, the lender agreed to extend the maturity date until October 14, 2022. In connection with the extension of the maturity date on the note, the Company agreed to increase the principal balance by $25,000. The Company evaluated the amendment and accounted for these changes as an extinguishment of debt. As of amendment date, the total unamortized discount on the Note was $0. The Company recognized a loss on extinguishment of debt of $25,000 and charged to interest expense at the time of the extension. The Company amortized $106,799 as interest expense during the nine months ended April 30, 2022. The total unamortized discount on the Note as of April 30, 2022 and July 31, 2021, were $0 and $106,799, respectively. The total principal balance outstanding as of April 30, 2022 and July 31, 2021, were $275,000 and $250,000, respectively. | ||||||||
| On August 31, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $75,000, annual interest rate of 8% and a default interest rate of 20%, and a maturity date of August 31, 2022. In connection with the execution of the note, the Company issued 150,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $13,635 as debt discount, and it will be amortized to interest expense during the term of the promissory note. The Holder may elect to convert up to 100% of the principal amount outstanding and any accrued interest on the Note into Common Stock at any time after 180 days of funding the Note. The Conversion Price shall be the greater of $0.15 or 75% of the lowest daily VWAP for the ten (10) trading day period immediately preceding the conversion date. The holder may elect to convert up to 100% of the principal plus accrued interest into the common stock into a qualified uplist financing at a 25% discount. The Company analyzed the Note for derivative accounting consideration and determined that since the note has a conversion price floor, it does not require to be accounted as a derivative instrument. The Company will evaluate every reporting period and identify if any default provisions and other requirements triggered a variable conversion price and if the note needs to be classified as a derivative instrument. The Company amortized $9,090 as interest expense during the nine months ended April 30, 2022. The total unamortized discount on the Note as of April 30, 2022, was $4,545. The total principal balance outstanding as of April 30, 2022, was $75,000. | - | |||||||
| On September 29, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $75,000, annual interest rate of 8% and a default interest rate of 20%, and a maturity date of September 29, 2022. In connection with the execution of the note, the Company issued 150,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $10,788 as debt discount, and it will be amortized to interest expense during the term of the promissory note. The Holder may elect to convert up to 100% of the principal amount outstanding and any accrued interest on the Note into Common Stock at any time after 180 days of funding the Note. The Conversion Price shall be the greater of $0.15 or 75% of the lowest daily VWAP for the ten (10) trading day period immediately preceding the conversion date. The holder may elect to convert up to 100% of the principal plus accrued interest into the common stock into a qualified uplist financing at a 25% discount. The Company analyzed the Note for derivative accounting consideration and determined that since the note has a conversion price floor, it does not require to be accounted as a derivative instrument. The Company will evaluate every reporting period and identify if any default provisions and other requirements triggered a variable conversion price and if the note needs to be classified as a derivative instrument. The Company amortized $6,293 as interest expense during the nine months ended April 30, 2022. The total unamortized discount on the Note as of April 30, 2022, was $4,495. The total principal balance outstanding as of April 30, 2022, was $75,000. | - | |||||||
19
| April 30, | July 31, | |||||||
| CONVERTIBLE NOTES PAYABLE NON-DERIVATIVE | 2022 | 2021 | ||||||
| On October 22, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $150,000, annual interest rate of 8% and a default interest rate of 20%, and a maturity date of October 22, 2022. In connection with the execution of the note, the Company issued 300,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $13,965 as debt discount, and it will be amortized to interest expense during the term of the promissory note. The Holder may elect to convert up to 100% of the principal amount outstanding and any accrued interest on the Note into Common Stock at any time after 180 days of funding the Note. The Conversion Price shall be the greater of $0.15 or 75% of the lowest daily VWAP for the ten (10) trading day period immediately preceding the conversion date. The holder may elect to convert up to 100% of the principal plus accrued interest into the common stock into a qualified uplist financing at a 25% discount. The Company analyzed the Note for derivative accounting consideration and determined that since the note has a conversion price floor, it does not require to be accounted as a derivative instrument. The Company will evaluate every reporting period and identify if any default provisions and other requirements triggered a variable conversion price and if the note needs to be classified as a derivative instrument. The Company amortized $6,983 as interest expense during the nine months ended April 30, 2022. The total unamortized discount on the Note as of April 30, 2022, was $6,982. The total principal balance outstanding as of April 30, 2022, was $150,000. | - | |||||||
| On February 4, 2022, as part the acquisition of Next Level, the Company entered into two unsecured convertible promissory notes (the “Unsecured Convertible Promissory Notes”) for $1,800,000 and $200,000, respectively. The notes are payable in eight equal quarterly installments in the aggregate amount of $250,000 each commencing on April 30, 2022, through and including January 31, 2024. With a base annual interest rate of 0% and a default annual interest rate of 18%. The Sellers have a onetime right to convert all or a portion of the Convertible Notes commencing on the six-month anniversary of the notes being issued and ending 30 days after such six-month anniversary. The conversion price means an amount equal to the volume weighted average price per share of Stock on the Nasdaq Stock Market for the ten (10) consecutive trading days on which the conversion notice is received by the Company; provided, however, that if the stock is not then listed for trading on the Nasdaq Stock Market, the Conversion Price shall be the volume weighted average transaction price per share reported by the OTC Reporting Facility for the ten (10) consecutive trading days immediately preceding the date on which such Conversion Notice is received by the Company. The Company analyzed the Notes for derivative accounting consideration and determined that since the notes are convertible on the six-month anniversary from issuance and ending 30 days after such six-month anniversary, it does not require to be accounted as a derivative instrument. The Company will evaluate every reporting period and identify if any of the provisions for conversion are met and if the notes need to be classified as a derivative instrument. The total principal balance outstanding on the Unsecured Convertible Promissory Notes as of April 30, 2022, was $2,000,000. | - | |||||||
| Total convertible notes payables non-derivative: | $ | $ | ||||||
| CONVERTIBLE NOTES PAYABLE - DERIVATIVE | ||||||||
| On July 27, 2020, the Company entered into a variable convertible promissory note with an aggregate principal amount of $275,000, annual interest rate of 8% and a maturity date of March 27, 2021. After payment of transaction-related expenses and closing fees of $35,000, net proceeds to the Company from the Note totaled $240,000. The Company recorded these discounts and cost of $35,000 as a discount to the Note and amortized over the term of the note. In connection with the execution of the note, the Company issued 500,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $11,626 as debt discount, and it will be amortized to interest expense during the term of the promissory note. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Holder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount into fully paid and nonassessable shares of Common Stock the Note Conversion Price shall equal the greater of $0.05 (five) cents or 25% discount to up-listing price or offering/underwriting price concurrent with the Company listing on Nasdaq or NYSE American., subject to adjustment as provided in this Note. If an Event of Default occurs, the Conversion Price shall be the lesser of (a). $0.05 (five) cents or (b). 75% of the lowest traded price in the prior fifteen trading days immediately preceding the Notice of Conversion. The Company analyzed the note for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. The Company recognized $61,678 of derivative liability and directly amortized all associated debt discount of $61,678 as interest expense. On July 31, 2021, the holder agreed to extend the maturity date until January 31, 2022. On February 14, 2022, the holder agreed to extend the maturity date until July 31, 2022. In connection with the extension of the maturity date on the note, the Company agreed to increase the principal balance by $75,000 and issued 250,000 shares of common stock with a market value of $34,150. The Company evaluated the amendment and accounted for these changes as an extinguishment of debt. As of amendment date, the total unamortized discount on the Note was $0. The Company recognized a loss on extinguishment of debt for both the $75,000 increase in principal and $34,150 fair value of shares issued and charged the total $109,150 to interest expense at the time of the extension. The total principal balance outstanding as of April 30, 2022, and July 31, 2021, were $430,000 and $355,000, respectively. | ||||||||
20
| April 30, | July 31, | |||||||
| CONVERTIBLE NOTES PAYABLE - DERIVATIVE | 2022 | 2021 | ||||||
| On January 31, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $80,235, annual interest rate of 8% and a maturity date of February 17, 2022. Subsequently, on March 7, 2022, the holder agreed to extend the maturity date until July 31, 2022. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Holder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount into fully paid and nonassessable shares of Common Stock the Note Conversion Price shall equal the greater of $0.05 (five) cents or seventy-five percent (75%) of the lowest daily VWAP over the ten (10) consecutive trading day period ending on the trading day immediately prior to the applicable conversion date (the “Variable Conversion Price”); provided, however, that the Holder shall, in its sole discretion, be able to convert any amounts due hereunder at a twenty-five percent (25%) discount to the per share price of the Qualified Uplisting Financing of over $4MM. If, no later than December 31, 2021, the Borrower shall fail to uplist to any tier of the NASDAQ Stock Market, the New York Stock Exchange or the NYSE MKT, the conversion price under the Note (and the Exchange Note) will be adjusted to equal the lesser of (i) $0.05 per share; or (ii) seventy-five percent (75%) of the lowest VWAP (as defined in the Note and Exchange Note) in the preceding twenty (20) consecutive Trading Days. The Company analyzed the note for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. As a result, the Company recognized derivative liability for the convertible note of $61,819, of which $61,819 was recorded as debt discount and amortized over the term of the note. The Company amortized $27,840 of debt discount as interest expense during the nine months ended April 30, 2022. The total unamortized discount on the Note as of April 30, 2022, and July 31, 2021, were $0 and $27,840, respectively. The total principal balance outstanding as of April 30, 2022, and July 31, 2021, was $80,235. | ||||||||
| On February 17, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $175,000, annual interest rate of 8% and a maturity date of February 17, 2022. After payment of transaction-related expenses and closing fees of $5,000, net proceeds to the Company from the Note totaled $170,000. Additionally, the Company recorded $5,000 as a discount to the Note and amortized over the term of the note. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Holder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount into fully paid and nonassessable shares of Common Stock the Note Conversion Price shall equal the greater of $0.05 (five) cents or seventy-five percent (75%) of the lowest daily VWAP over the ten (10) consecutive trading day period ending on the trading day immediately prior to the applicable conversion date (the “Variable Conversion Price”); provided, however, that the Holder shall, in its sole discretion, be able to convert any amounts due hereunder at a twenty-five percent (25%) discount to the per share price of the Qualified Uplisting Financing of over $4MM. If, no later than December 31, 2021, the Borrower shall fail to uplist to any tier of the NASDAQ Stock Market, the New York Stock Exchange or the NYSE MKT, the conversion price under the Note (and the Exchange Note) will be adjusted to equal the lesser of (i) $0.05 per share; or (ii) seventy-five percent (75%) of the lowest VWAP (as defined in the Note and Exchange Note) in the preceding twenty (20) consecutive Trading Days. The Company analyzed the note for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. As a result, the Company recognized derivative liability for the convertible note of $346,091, of which $170,000 was recorded as debt discount and amortized over the term of the note, and $176,091 was recorded as day 1 derivative loss. The total unamortized discount on the Note as of April 30, 2022, and July 31, 2021, were $0 and $102,083, respectively. The Company amortized $102,083 of debt discount as interest expense during the nine months ended April 30, 2022. On March 7, 2022, the Company paid in full the total principal balance outstanding of $175,000 and accrued interest and prepayment penalty of $30,000. As part of the payoff of the note, the Company resolved $76,134 of the derivative liability against additional paid in capital. The total principal balance outstanding as of April 30, 2022, and July 31, 2021, were $0 and $175,000, respectively. | - | |||||||
21
| April 30, | July 31, | |||||||
| CONVERTIBLE NOTES PAYABLE - DERIVATIVE | 2022 | 2021 | ||||||
| On April 15, 2021, the Company entered into a variable convertible promissory note with an aggregate principal amount of $113,000, annual interest rate of 8% and a maturity date of January 15, 2022. After payment of transaction-related expenses and closing fees of $13,000, net proceeds to the Company from the Note totaled $100,000. Additionally, the Company recorded $13,000 as a discount to the Note and amortized over the term of the note. In connection with the execution of the note, the Company issued 100,000 shares of our common stock to the note holder, at the time of issuance, the Company recognized the relative fair market value of the shares of $14,138 as debt discount, and it will be amortized to interest expense during the term of the promissory note. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Holder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount into fully paid and nonassessable shares of Common Stock. The Note Conversion Price shall equal the greater of $0.15 (fifteen) cents or 25% discount to up-listing price or offering/underwriting price concurrent with the Company listing on Nasdaq or NYSE American., subject to adjustment as provided in the Note. If an Event of Default occurs, the Conversion Price shall be the lesser of (a). $0.15 (fifteen) cents or (b). seventy-five percent (75%) of the lowest traded price in the prior fifteen (15) consecutive trading day period ending on the trading day immediately prior to the applicable conversion date (the “Variable Conversion Price”). Outstanding Balance shall immediately increase to 125% of the Outstanding Balance immediately prior to the occurrence of the Event of Default and a daily penalty of $500 will accrue until the default is remedied. The Company analyzed the note for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. As a result, the Company recognized derivative liability for the convertible note of $64,561, of which $42,822 was recorded as debt discount and amortized over the term of the note. On January 15, 2022, the lender agreed to extend the maturity date until March 31, 2022. As consideration for the extension on the note, the Company agreed to add 15,000 to the principal amount outstanding. On March 31, 2022, the lender agreed to extend the maturity date until July 31, 2022. As consideration for the extension on the note, the Company agreed to add $15,000 to the principal amount outstanding. The Company evaluated the amendments and accounted for these changes as an extinguishment of debt. As of both amendment date, the total unamortized discount on the Note was $0. The Company recognized a loss on extinguishment of debt for both $15,000 increase in principal and charged the total $30,000 to interest expense at the time of the extension. The total unamortized discount on the Note as of April 30, 2022, and July 31, 2021, were $0 and $50,945, respectively. The Company amortized $50,945 of debt discount as interest expense during the nine months ended April 30, 2022. The total principal balance outstanding as of April 30, 2022, and July 31, 2021, were, $143,000 and $113,000, respectively. | ||||||||
| On January 21, 2022, the Company entered into a variable convertible promissory note with an aggregate principal amount of $230,000, annual interest rate of 8% and a maturity date of October 21, 2022. After payment of transaction-related expenses and closing fees of $26,300, net proceeds to the Company from the Note totaled $203,700. Additionally, the Company recorded $26,300 as a discount to the Note and amortized over the term of the note. In connection with the execution of the note, the Company issued 300,000 shares of our common stock to the note holder and recorded $300 as debt discount and amortized over the term of the note. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Holder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount into fully paid and nonassessable shares of Common Stock. The Note Conversion Price shall equal the greater of $0.15 (fifteen) cents or 25% discount to up-listing price or offering/underwriting price concurrent with the Company listing on Nasdaq or NYSE American., subject to adjustment as provided in the Note. Outstanding Balance shall immediately increase to 125% of the Outstanding Balance immediately prior to the occurrence of the Event of Default and a daily penalty of $500 will accrue until the default is remedied. The Company analyzed the note for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. As a result, the Company recognized derivative liability for the convertible note of $55,866. The Company recorded $30,146 debt discount from derivative. The total unamortized discount on the Note as of April 30, 2022, was $37,831. The Company amortized $18,915 of debt discount as interest expense during the nine months ended April 30, 2022. The total principal balance outstanding as of April 30, 2022, was $230,000. | - | |||||||
22
| April 30, | July 31, | |||||||
| CONVERTIBLE NOTES PAYABLE - DERIVATIVE | 2022 | 2021 | ||||||
| On January 21, 2022, the Company entered into a variable convertible promissory note with an aggregate principal amount of $230,000, annual interest rate of 8% and a maturity date of October 21, 2022. After payment of transaction-related expenses and closing fees of $26,300, net proceeds to the Company from the Note totaled $203,700. Additionally, the Company recorded $26,300 as a discount to the Note and amortized over the term of the note. In connection with the execution of the note, the Company issued 300,000 shares of our common stock to the note holder and recorded $300 as debt discount and amortized over the term of the note. Until the earlier of 6 months or the Company listing on Nasdaq or NYSE American, the Holder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount into fully paid and nonassessable shares of Common Stock. The Note Conversion Price shall equal the greater of $0.15 (fifteen) cents or 25% discount to up-listing price or offering/underwriting price concurrent with the Company listing on Nasdaq or NYSE American., subject to adjustment as provided in the Note. Outstanding Balance shall immediately increase to 125% of the Outstanding Balance immediately prior to the occurrence of the Event of Default and a daily penalty of $500 will accrue until the default is remedied. The Company analyzed the note for derivative accounting consideration and determined that the embedded conversion option qualified as a derivative instrument, due to the variable conversion price. As a result, the Company recognized derivative liability for the convertible note of $55,866. The Company recorded $30,146 debt discount from derivative. The total unamortized discount on the Note as of April 30, 2022, was $37,831. The Company amortized $18,915 of debt discount as interest expense during the nine months ended April 30, 2022. The total principal balance outstanding as of April 30, 2022, was $230,000. | - | |||||||
| Total convertible notes payable - derivative: | $ | $ | ||||||
| Total convertible notes payable derivative and non-derivative | ||||||||
| Less: discount on convertible notes payable | ( | ) | ( | ) | ||||
| Total convertible notes payable, net of discount | ||||||||
| Less: current portion of convertible notes payable | ( | ) | ( | ) | ||||
| Long-term portion of convertible notes payable | $ | $ | - | |||||
Additional terms No.1: The Holder
shall have the right at any time on or after six (6) months from the Issue Date to convert any portion of the outstanding and unpaid principal
balance into fully paid and nonassessable shares of Common Stock. The Note Conversion Price shall equal
The total unamortized discount on the convertible
notes as of April 30, 2022, and July 31, 2021, were $
23
NOTE 9 - LEASES
The leased properties have a remaining lease term of twelve to thirty-seven months as of August 1, 2021 (Beginning on the current fiscal year). At the option of the Company, it can elect to extend the term of the leases. See table below:
| Location | Annual Rent | Lease Expiration Date | Business Use | Approx. Sq. Ft. | ||||||||
| 825 W. Bitters, Suite 104, San Antonio, TX 78216 | $ | |||||||||||
| 8023 Vantage Dr., Suite 660, San Antonio, Texas 78230 | $ | |||||||||||
| 10967 Via Frontera, San Diego, CA 92127 | $ | |||||||||||
| 1610 Royal Palm Avenue, Suite 300, Fort Myers, FL 33901 | $ | |||||||||||
| 2121 Ponce de Leon Blvd., Suite 200, Coral Gables FL 33134 | $ | |||||||||||
| 7218 McNeil Dr., FL-1, Austin, TX 78729 | $ | |||||||||||
| 6606 Lyndon B. Johnson, Fwy., FL1, Suite 125, Dallas, TX 75240 | $ | |||||||||||
| 9701 S. John Young Parkway, Orlando, FL 32819 | $ | |||||||||||
| 50 NE 9th St, Miami, FL 3313 | $ | |||||||||||
| 350 NW 215 St., Miami Gardens, FL 33169 | $ | |||||||||||
| 8333 NW 53rd St, Doral, FL 33166 | $ | |||||||||||
| 100 SE 2nd Street, Miami, FL 33131 | $ | |||||||||||
| 9055 SW 73rd Ct, Miami, FL 33156 | $ | |||||||||||
| 9517 Fontainebleau Blvd., Miami, FL 33172 | $ | |||||||||||
The Company has not entered into any sale and leaseback transactions during the nine months ended April 30, 2022
In February 2022, as part of the acquisition of
NLI, the Company secured an office lease, with a monthly base lease payment of $
In December 2021, as part of the acquisition of
Skynet Telecom LLC’s assets, the Company assumed an office lease in San Antonio, Texas.
In January 2021,
In November 2020, as part of the acquisition of Nexogy, Inc., the Company assumed an office lease in Coral Gable Florida, two network facilities and five wireless internet network leases. The leases’ expiration dates range from May 2022 to July 2025, and at the option of the Company, the leases can be extended for various periods ranging from one to five years, with a base rent at the prevailing market rate at the time of the renewal.
24
Amounts recognized on July 31, 2021, and April 30, 2022, for operating leases are as follows:
| ROU Asset | July 31, 2021 | $ | ||||
| Amortization | $ | ( | ) | |||
| Addition - Asset | $ | |||||
| ROU Asset | April 30, 2022 | $ | ||||
| Lease Liability | July 31, 2021 | $ | ||||
| Amortization | $ | ( | ) | |||
| Addition - Liability | $ | |||||
| Lease Liability | April 30, 2022 | $ | ||||
| Lease Liability | Short term | $ | ||||
| Lease Liability | Long term | $ | ||||
| Lease Liability | Total: | $ |
| Operating lease cost: | $ | |||
| Cash paid for amounts included in the measurement of lease labilities | ||||
| Operating cashflow from operating leases: | $ | |||
| Weighted-average remain lease term-operating lease: | ||||
| Weighted-average discount rate | % |
For the nine months ended April 30, 2022, the
amortization of operating ROU assets was$
For the nine months ended April 30, 2022, the
amortization of operating lease liabilities was $
The future minimum lease payment under the operating leases are as follows:
| Period Ending July 31, | Lease Payments | |||
| 2022* | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Total: | $ | |||
| * | remaining 3 Months |
NOTE 10 – PREFERED STOCK
SERIES A CONVERTIBLE PREFERRED STOCK
In August 2020, the Company’s
Board of Directors designated and authorized the issuance of up to
25
The “Conversion Price” at which shares of Common Stock
shall be issuable upon conversion of any shares of Series A Convertible Preferred Stock shall initially be $
During the nine months ended April 30, 2022, the Company evaluated Series A Convertible Preferred Stock and concluded that none of the mandatory conversion events occurred during the period and determined that the convertible shares were classified as equity instruments.
SERIES B CONVERTIBLE PREFERRED STOCK
In April 2020, the Company’s
Board of Directors designated and authorized the issuance up to
The Company had
The terms of our Series B Convertible Preferred Stock allow for:
Mandatory Conversion. Upon
26
During the nine months ended April 30, 2022, the Company evaluated Series B Convertible Preferred Stock and concluded that none of the mandatory conversion events occurred during the period and determined that the convertible shares were classified as equity instruments.
SERIES C CONVERTIBLE PREFERRED STOCK
In July 2020, the Company’s Board of Directors designated and
authorized the issuance up to
On February 25, 2021, Digerati’s Board
of Directors approved the issuance of the following shares of Series C Convertible Preferred Stock.
| ● | Arthur L. Smith – 28,928 shares of Series C Convertible Preferred Stock | |
| ● | Antonio Estrada – 19,399 shares of Series C Convertible Preferred Stock | |
| ● | Craig Clement – 7,073 shares of Series C Convertible Preferred Stock |
The Series C Convertible
Preferred Stock was issued for accrued compensation to the management team of $
The Company had
The terms of our Series C Convertible Preferred Stock allow for:
Automatic Conversion. Upon
27
SERIES F SUPER VOTING PREFERRED STOCK
In July 2020, the Company’s
Board of Directors designated and authorized the issuance up to
On November 17, 2020,
| ● | Arthur L. Smith - 34 shares of Series F Super Voting Preferred Stock |
| ● | Antonio Estrada - 33 shares of Series F Super Voting Preferred Stock |
| ● | Craig Clement - 33 shares of Series F Super Voting Preferred Stock |
The Company had 100 shares outstanding of the Series F Super Voting Preferred Stock as of April 30, 2022. No dividends are payable on the Series F Super Voting Preferred Stock.
The terms of our Series F Super Voting Preferred Stock allow for:
Voting Rights. As long as any shares of Series F Super Voting Preferred Stock are outstanding, the Company shall not, without the affirmative vote of the Holders of a majority of the then outstanding shares of the Series F Super Voting Preferred Stock, (a) alter or change adversely the powers, preferences or rights given to the Series F Super Voting Preferred Stock or alter or amend its Certificate of Designation, (b) amend its certificate of incorporation or other charter documents in any manner that adversely affects any rights of the Holders, (c) increase the number of authorized shares of Series F Super Voting Preferred Stock, (d) sell or otherwise dispose of any assets of the Company not in the ordinary course of business, (e) sell or otherwise effect or undergo any change of control of the corporation, (f) effect a reverse split of its Common Stock, or (g) enter into any agreement with respect to any of the foregoing.
Conversion. No conversion rights apply to the Series F Super Voting Preferred Stock.
NOTE 11 – EQUITY
During the nine months ended April 30, 2022, the Company issued the following shares of common stock:
On August 31, 2021, the Company
entered into a $
28
On September 29, 2021, the
Company entered into a $
On January 21, 2022, the Company
secured two promissory notes for $
On February 14, 2022, the Company entered into
a note extension agreement, and as consideration for the extension, the Company issued
On March 7, 2022, the Company
paid in full the total principal balance outstanding on a convertible promissory note of $
NOTE 12 – ACQUISITIONS
Skynet Asset Purchase Agreement
On December 31, 2021, our indirect, wholly owned subsidiary, Shift8 Networks, Inc., a Texas corporation (“Shift8”), executed and closed on an Asset Purchase Agreement (the “Purchase Agreement”) with Skynet Telecom LLC, a Texas limited liability company (“Seller” or “Skynet”), and Paul Golibart and Jerry Ou, each an individual resident in the State of Texas (each, an “Owner” and collectively, the “Owners”).
Pursuant to the Purchase Agreement, Shift8 acquired the customer base, certain equipment, certain intellectual property, inventory, contract rights, software and other licenses and miscellaneous assets used in connection with the operation of Seller’s communications business, including but not limited to subscriber-based Interconnected Voice Over Internet Protocol communication services (“I-VoIP”), Unified Cloud Communications Services (“UCCS”), and IPPBX based systems of telephony (collectively, the “Purchased Assets”).
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The acquisition was accounted for under the purchase method of accounting, with Digerati identified as the acquirer. Under the purchase method of accounting, the aggregate amount of consideration assumed by Digerati was allocated to customer contracts acquired and intangible assets based on their estimated fair values as of December 31, 2021. Allocation of the purchase price is based on the best estimates of management.
The following table presents the preliminary allocation of the purchase price to the assets acquired and liabilities assumed for the acquisition of Skynet. The allocation of fair values is preliminary and is subject to change in the future during the measurement period.
| Skynet | ||||
| (in thousands) | ||||
| Accounts receivable, net | $ | |||
| Inventory | ||||
| Intangible assets and Goodwill | ||||
| Property and Equipment, net | ||||
| Operating lease right-of-use asset | ||||
| Deposits and other assets | ||||
| Total identifiable assets | $ | |||
| Less: Liabilities assumed | ||||
| Total Purchase price | $ | |||
The following table summarizes the cost of intangible assets related to the acquisition:
| Skynet | Useful Life | ||||||
| (in thousands) | (in Years) | ||||||
| Customer Relationships | $ | ||||||
| Trade Names and Trademarks | |||||||
| Non-Compete Agreement | |||||||
| Goodwill | - | ||||||
| Total intangible assets | $ | ||||||
In addition, the Company incurred approximately
$
As part of the acquisitions of Skynet’s
assets,
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Proforma
The following schedule contains proforma consolidated results of operations for the nine months ended April 30, 2022, and 2021 as if the acquisition occurred on August 1, 2020. The proforma results of operations are presented for informational purposes only and are not indicative of the results of operations that would have been achieved if the acquisition had taken place on August 1, 2020, or of results that may occur in the future.
| (In thousands) | ||||||||||||||||
| Nine months ended April 30, | ||||||||||||||||
| 2022 | 2021 | |||||||||||||||
| Reported | Proforma | Reported | Proforma | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Income (loss) from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income (loss) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Earnings (loss) per common share-Basic and Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Next Level Internet Equity Purchase Agreement
On February 4, 2022, the Company, T3 Nevada and the two owners of NLI (the “Sellers”), entered into and closed on an Equity Purchase Agreement (the “Equity Purchase Agreement”). Pursuant to the Equity Purchase Agreement, T3 Nevada bought all of the equity interests in NLI from the Sellers. NLI is engaged in the business of providing cloud based Unified Communications as a Service, collaboration, contact center, managed connectivity and other voice and data services to small, medium, and large enterprises.
The total purchase price is up to $
T3 Nevada paid $8.69 million in cash to the Sellers on the closing date of February 4, 2022.
The acquisition was accounted for under the purchase method of accounting, with Digerati identified as the acquirer. Under the purchase method of accounting, the aggregate amount of consideration assumed by Digerati was allocated to customer contracts acquired and intangible assets based on their estimated fair values as of February 4, 2022. Allocation of the purchase price is based on the best estimates of management.
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The following table presents the preliminary allocation of the purchase price to the assets acquired and liabilities assumed for the Next Level acquisition. The allocation of fair values is preliminary and is subject to change in the future during the measurement period.
| Next Level | ||||
| Internet | ||||
| (in thousands) | ||||
| Cash | $ | |||
| Accounts receivable, net | ||||
| Prepaid and other current assets | ||||
| Intangible assets and Goodwill | ||||
| Property and Equipment, net | ||||
| Deposits and other assets | ||||
| Operating lease right-of-use asset | ||||
| Total identifiable assets | $ | |||
| Less: Liabilities assumed | ||||
| Less: Operating lease liability | ||||
| Total Purchase price | $ | |||
The following table summarizes the cost of intangible assets related to the acquisition:
| Next Level | |||||||
| Internet | Useful Life | ||||||
| (in thousands) | (in Years) | ||||||
| Customer Relationships | $ | ||||||
| Trade Names and Trademarks | |||||||
| Non-Compete Agreement | |||||||
| Goodwill | - | ||||||
| Total intangible assets | $ | ||||||
In addition, the Company incurred approximately
$
Proforma
The following schedule contains proforma consolidated results of operations for the nine months ended April 30, 2022, and 2021 as if the acquisition occurred on August 1, 2020. The proforma results of operations are presented for informational purposes only and are not indicative of the results of operations that would have been achieved if the acquisition had taken place on August 1, 2020, or of results that may occur in the future.
| (In thousands) | ||||||||||||||||
| Nine months ended April 30, | ||||||||||||||||
| 2022 | 2021 | |||||||||||||||
| Reported | Proforma | Reported | Proforma | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Income (loss) from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income (loss) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Earnings (loss) per common share-Basic and Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
As part of the acquisition of NLI., the Company
secured an office lease, with a monthly base lease payment of $
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NOTE 13 – SUBSEQUENT EVENTS
Unsecured Convertible Promissory Notes payment
On May 2, 2022, the Company made a quarterly principal
payment of $
Unsecured Adjustable Promissory Notes payment
On June 6, 2022, the Company made a quarterly
principal payment of $
Forbearance Agreement and Third Amendment to Credit Agreement
On February 4, 2022, the T3 Nevada Parties and NLI (collectively, the “Loan Parties”) and Post Road entered into a Joinder and Second Amendment to Credit Agreement (the “Joinder”) whereby, among other terms, NLI became a guarantor of T3’s obligations pursuant to the Credit Agreement and notes issued pursuant thereto.
On June 13, 2022, the parties to the Joinder entered into a Forbearance Agreement and Third Amendment to Credit Agreement (“Forbearance Agreement”).
The Forbearance Agreement was entered into because certain events of
default related to both the Credit Agreement and the Joinder have occurred.
The events of default unrelated to financial covenants were the Loan Parties’ failure to: (a) deliver certain certificates, financial information and projections, lease, landlord, and control agreements, and evidence of a UCC-3 filing; (b) close or consolidate certain bank accounts; (c) provide ten (10) business days’ notice prior to the Company filing certain filings with the Securities and Exchange Commission (the “SEC”) and the Nevada Secretary of State; and (d) engage an industry consultant acceptable to the Agent to consult with the Loan Parties on integration strategy, future acquisitions, operating performance, and various business issues.
Pursuant to the Forbearance Agreement, Post Road agreed to forbear through the Forbearance Period (as defined below) from (i) exercising its rights and remedies with regard to the existing events of default and (ii) requiring compliance with the financial covenants set forth in Section 11.12 of the Credit Agreement (related to leverage, EBITDA, liquidity, capital expenditures, fixed charge coverage ratio, and churn). The “Forbearance Period” is from June 13, 2022 through the earlier of (a) August 8, 2022, (b) the date on which any other event of default not enumerated in the Forbearance Agreement occurs or is deemed to have occurred, or (c) the date of any failure of any Loan Party to comply with any aspect of the Forbearance Agreement. The forbearance does not constitute a waiver of the defaults enumerated nor does it impair the ability of Post Road to exercise its rights and remedies after the expiration of the Forbearance Period.
In addition, the Forbearance Agreement amends the Credit Agreement to clarify Section 10.15 with regard to the Company’s affirmative covenant to comply with its SEC reporting obligations. It also amends the Credit Agreement to clarify the provisions of the Section 10 (affirmative covenants) whose violation constitute an event of default. Finally, the Forbearance Agreement amends the Joinder to allow T3 Nevada to give the Agent draft copies of its 10-Ks and 10-Qs and 8-Ks for the Agent and its advisors review only five business days (10-Ks) or two business days (10-Qs and 8-Ks) in advance rather than ten business days in advance as originally required by the Joinder.
The Company anticipates implementing remedies by July 31, 2022 to resolve the financial covenants breaches and the breaches regarding delivering a compliance certificate, financial projections, and a landlord agreement along with engaging an industry consultant. The Company and Post Road have agreed to work in good faith to adjust the financial covenants set forth in Section 11.12 of the Credit Agreement to include the financial impact of the acquisition of Skynet and Next Level. As of the date of this filing, the Company cannot predict the final outcome of the negotiations with Post Road.
The other non-financial events of default were covenants that were complied with, however, the compliance was not timely pursuant to the provisions of the Credit Agreement and Joinder. These events of default have not been waived by Post Road.
The foregoing summary of the Forbearance Agreement contains only a brief description of the material terms of the Forbearance Agreement and such description is qualified in its entirety by reference to the full text of the Forbearance Agreement, filed herewith as Exhibit 10.3 and incorporated by reference herein.
Expired Leases
As detailed in Note 9, two of the Company’s lease agreements (one for a property in Dallas, Texas and one for a property in Miami Gardens, Florida) expired in May 2022. Those leases are now on a month to month basis with the monthly lease payment remaining the same as it was in May 2022. The Company is currently negotiating long-term extensions of those lease agreements although no guarantees can be made that such extensions will be reached.
Series A Convertible Preferred Stock Certificate of Correction
On May 24, 2022, the Company filed a Certificate of Correction with the Nevada Secretary of State with regard to the Company’s Series A Convertible Preferred Stock Certificate of Designation originally filed in August 2020.
The Certificate of Correction was filed to correct,
among other provisions, certain dates, to correct the Series A Convertible Preferred Stock’s initial conversion price (it is $
The foregoing summary of the Certificate of Correction contains only a brief description of the material terms of the Certificate of Correction and such description is qualified in its entirety by reference to the full text of the Certificate of Correction, filed herewith as Exhibit 3.1 and incorporated by reference herein.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. “Forward-looking statements” are those statements that describe management’s beliefs and expectations about the future. We have identified forward-looking statements by using words such as “anticipate,” “believe,” “could,” “estimate,” “may,” “expect,” “plan,” and “intend.” Although we believe these expectations are reasonable, our operations involve a number of risks and uncertainties. Some of these risks include the availability and capacity of competitive data transmission networks and our ability to raise sufficient capital to continue operations. Additional risks are included in our Annual Report on Form 10-K for the fiscal year ended July 31, 2021, filed with the Securities and Exchange Commission on October 26, 2021.
The following is a discussion of the unaudited interim consolidated financial condition and results of operations of Digerati for the three and nine months ended April 30, 2022, and 2021. It should be read in conjunction with our audited Consolidated Financial Statements, the Notes thereto, and the other financial information included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2021, filed with the Securities and Exchange Commission on October 26, 2021. For purposes of the following discussion, fiscal 2022 or 2022 refers to the year that will end on July 31, 2022, and fiscal 2021 or 2021 refers to the year ended July 31, 2021.
Overview
Digerati Technologies, Inc., a Nevada corporation (including our subsidiaries, “we,” “us,” “Company” or “Digerati”), through its operating subsidiaries in Texas and Florida, Shift8 Networks, Inc., dba, T3 Communications and T3 Communications, Inc., respectively, and Nexogy Inc., a Florida corporation, provides cloud services specializing in Unified Communications as a Service (“UCaaS”) solutions for the business market. Our product line includes a portfolio of Internet-based telephony products and services delivered through our cloud application platform and session-based communication network and network services including Internet broadband, fiber, mobile broadband, and cloud WAN solutions (SD WAN). Our services are designed to provide enterprise-class, carrier-grade services to the small-to-medium-sized business (“SMB”) at cost-effective monthly rates. Our UCaaS or cloud communication services include fully hosted IP/PBX, mobile applications, Voice over Internet Protocol (“VoIP”) transport, SIP trunking, and customized VoIP services all delivered Only in the Cloud™.
As a provider of cloud communications solutions to the SMB, we are seeking to capitalize on the migration by businesses from the legacy telephone network to the Internet Protocol (“IP”) telecommunication network and the migration from hardware-based on-premise telephone systems to software-based communication systems in the cloud. Most SMBs are lagging in technical capabilities and advancement and seldom reach the economies of scale that their larger counterparts enjoy, due to their achievement of a critical mass and ability to deploy a single solution to a large number of workers. SMBs are typically unable to afford comprehensive enterprise solutions and, therefore, need to integrate a combination of business solutions to meet their needs. Cloud computing has revolutionized the industry and opened the door for businesses of all sizes to gain access to enterprise applications with affordable pricing. This especially holds true for cloud telephony applications, but SMBs are still a higher-touch sale that requires customer support for system integration, network installation, cabling, and troubleshooting. We have placed a significant emphasis on that “local” touch when selling, delivering, and supporting our services which we believe will differentiate us from the national providers that are experiencing high attrition rates due to poor customer support.
The adoption of cloud communication services is being driven by the convergence of several market trends, including the increasing costs of maintaining installed legacy communications systems, the fragmentation resulting from use of multiple on-premise systems, and the proliferation of personal smartphones used in the workplace. Today, businesses are increasingly looking for an affordable path to modernizing their communications system to improve productivity, business performance and customer experience.
Our cloud solutions offer the SMB reliable, robust, and full-featured services at affordable monthly rates that eliminates high-cost capital expenditures and provides for integration with other cloud-based systems.
Recent events
On December 31, 2021, the Company closed on an Asset Purchase Agreement (the “Purchase Agreement”) with Skynet Telecom LLC (“Skynet”). Pursuant to the Purchase Agreement, the Company acquired the customer base, certain equipment, certain intellectual property, inventory, contract rights, software and other licenses and miscellaneous assets used in connection with the operation of Seller’s communications business, including but not limited to subscriber-based Interconnected Voice Over Internet Protocol communication services (“I-VoIP”), Unified Cloud Communications Services (“UCCS”), and IPPBX based systems of telephony.
On February 4, 2022, the Company acquired the equity interest in San Diego based Next Level Internet, Inc. (“Next Level” or “NLI”), a service provider engaged in the business of providing cloud based Unified Communications as a Service, collaboration, contact center, managed connectivity and other voice and data services to small, medium, and large enterprises. The acquisition of Next Level expands the Company’s growing nationwide footprint and adds a strong West Coast presence with nearly 1,000 SMB clients in California.
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Sources of revenue:
Cloud Software and Service Revenue: We provide UCaaS or cloud communication services and managed cloud-based solutions to small and medium size enterprise customers and to other resellers. Our Internet-based services include fully hosted IP/PBX services, SIP trunking, call center applications, auto attendant, voice and web conferencing, call recording, messaging, voicemail to email conversion, integrated mobility applications that are device and location agnostic, and other customized IP/PBX features in a hosted or cloud environment. Other services include enterprise-class data and connectivity solutions through multiple broadband technologies including cloud WAN or SD-WAN (Software-defined Wide Area Network), fiber, mobile broadband, and Ethernet over copper. We also offer remote network monitoring, data backup and disaster recovery.
Direct Costs:
Cloud Software and Service: We incur bandwidth and colocation charges in connection with our UCaaS or cloud communication services. The bandwidth charges are incurred as part of the connectivity between our customers to allow them access to our various services. We also incur costs from underlying providers for fiber, Internet broadband, and telecommunication circuits in connection with our data and connectivity solutions.
Results of Operations
Three Months ended April 30, 2022, Compared to Three Months ended April 30, 2021.
Cloud Software and Service Revenue. Cloud software and service revenue increased by $4,412,000 or 118% from the three months ended April 30, 2021, to the three months ended April 30, 2022. The increase in revenue is primarily attributed to the increase in total customers between periods due to the acquisition of Skynet in December 2021 and the acquisition of Next Level in February 2022. Our total number of customers increased from 2,612 for the three months ended April 30, 2021, to 3,963 customers for the three months ended April 30, 2022.
Cost of Services (exclusive of depreciation and amortization). The cost of services increased by $1,635,000 or 107%, from the three months ended April 30, 2021, to the three months ended April 30, 2022. The increase in cost of services is primarily attributed to the consolidation of various networks as part of the increase in total customers between periods due to the acquisition of Skynet in December 2021 and the acquisition of Next Level in February 2022. Our total number of customers increased from 2,612 for the three months ended April 30, 2021, to 3,963 customers for the three months ended April 30, 2022. However, our consolidated gross margin improved by $2,777,000 from the three months ended April 30, 2021, to the three months ended April 30, 2022.
Selling, General and Administrative (SG&A) Expenses (exclusive of legal and professional fees and stock compensation expense). SG&A expenses increased by $2,457,000, or 136%, from the three months ended April 30, 2021, to the three months ended April 30, 2022. The increase in SG&A is attributed to the acquisition of Skynet in December 2021 and the acquisition of Next Level in February 2022. As part of the consolidation, the Company absorbed all of the employees responsible for service delivery for the customer base, technical support, sales, customer service, and administration.
Stock Compensation expense. Stock compensation expense decreased by $154,000, from the three months ended April 30, 2021, to the three months ended April 30, 2022. The decrease between periods is attributed to the recognition during the three months ended April 30, 2021, the Company recognized $57,000 in stock options expense associated with stock options awarded to various employees and $125,000 in stock compensation for consulting services. During the three months ended April 30, 2022, the Company only recognized $23,000 in stock compensation for the amortization of stock options issued various employees, in addition the Company recognized $5,000 in stock option expense for the modification of stock options previously issued.
Legal and professional fees. Legal and professional fees increased by $552,000, from the three months ended April 30, 2021, to the three months ended April 30, 2022. The increase between periods is attributed to the recognition during the three months ended April 30, 2022, of $589,000 in professional fees for audits, quality of earnings and due diligence related to the acquisition of Skynet and Next Level.
Bad debt. Bad debt increased by $31,000, from the three months ended April 30, 2021, to the three months ended April 30, 2022. The increase is attributed to the recognition of $36,000 in bad debt for accounts deemed uncollectible during the period ended April 30, 2022.
Depreciation and amortization. Depreciation and amortization increased by $929,000, from the three months ended April 30, 2021, to the three months ended April 30, 2022. The increase is primarily attributed to the acquisition of Skynet and Next Level and the related amortization of intangible assets for $915,000.
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Operating loss. The Company reported an operating loss of $1,626,000 for the three months ended April 30, 2022, compared to an operating loss of $588,000 for the three months ended April 30, 2021. The increase in operating loss between periods is primarily due to the increase in cost of services of $1,635,000, the increase in SG&A of $2,457,000, the increase in legal fees of $552,000, the increase in depreciation and amortization of $929,000, and the increase in bad debt expense of $31,000. These increases were slightly offset by the decrease in stock compensation expense of $154,000, and the improvement in gross margin of $2,777,000.
Gain (loss) on derivative instruments. Gain (loss) on derivative instruments improved by $17,705,000 from the three months ended April 30, 2021, to the three months ended April 30, 2022. We are required to re-measure all derivative instruments at the end of each reporting period and adjust those instruments to market, as a result of the re- measurement of all derivative instruments we recognized a gain or loss between periods.
Gain (loss) on settlement of debt. Gain (loss) on settlement of debt decreased by $150,000 from the three months ended April 30, 2021, to the three months ended April 30, 2022. The Company determined that a previously accrued obligations was satisfied with our vendors and recognized a gain of $150,000 during the three months ended April 30, 2021.
Income tax benefit (expense). During the three months ended April 30, 2022, the Company recognized an income tax expense of $167,000. During the three months ended April 30, 2021, the Company recognized an income tax expense of $63,000.
Other income (expense). Other income (expense) improved by $2,000 from the three months ended April 30, 2021, to the three months ended April 30, 2022. During the three months ended April 30, 2022, the Company recognized other income of $2,000 and during the period ended April 30, 2021, the Company did not recognize other income.
Interest expense. Interest expense increased by $99,000 from the three months ended April 30, 2021, to the three months ended April 30, 2022. During the quarter ended April 30, 2022, the Company recognized non-cash interest / accretion expense of $89,000 related to the adjustment to the present value of various convertible notes and debt. Additionally, the Company recognized $814,000 in interest expense for cash interest payments on various promissory notes, accrual of $373,000 for interest expense for various promissory notes and $34,000 fair value of shares issued as well as $115,000 added to the principal balance of various promissory notes, all recognized as loss on debt extinguishment charged to interest expense as consideration for extension of the maturity dates. The Company also directly amortized $250,000 original issuance discount on a new promissory note as interest expense.
Net income (loss) including noncontrolling interest. Net income including noncontrolling interest for the three months ended April 30, 2022, was $3,360,000, an improvement in net (loss) of $16,316,000, as compared to a net (loss) for the three months ended April 30, 2021, of $12,956,000. The improvement in net loss including noncontrolling interest between periods is primarily due to the improvement in derivative gain of $17,705,000, the decrease of $154,000 in stock compensation expense and the improvement of $2,777,000 in gross margin. The improvement in net income including noncontrolling interest was slightly offset by the increase of $2,457,000 in SG&A, the increase of $552,000 in legal and professional fees, increase in bad debt of $31,000, and the increase of $929,000 in depreciation and amortization expense.
Net Income attributable to the noncontrolling interest. During the three months ended April 30, 2022, and 2021, the consolidated entity recognized net income in noncontrolling interest of $546,000 and $158,000, respectively. The noncontrolling interest is presented as a separate line item in the Company’s stockholders equity section of the balance sheet.
Net income (loss) attributable to Digerati’s shareholders. Net income for the three months ended April 30, 2022, was $3,906,000 compared to a net loss for the three months ended April 30, 2021, of $12,798,000.
Deemed dividend on Series A Convertible Preferred Stock. Dividend declared on convertible preferred stock for the three months ended April 30, 2022, and 2021, were, $4,000 and $5,000, respectively.
Net income (loss) attributable to Digerati’s common shareholders. Net income for the three months ended April 30, 2022, was $3,902,000 compared to a net (loss) for the three months ended April 30, 2021, of $12,803,000.
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Nine Months ended April 30, 2022, Compared to Nine Months ended April 30, 2021.
Cloud Software and Service Revenue. Cloud software and service revenue increased by $7,330,000, or 85% from the nine months ended April 30, 2021, to the nine months ended April 30, 2022. The increase in revenue is primarily attributed to the increase in total customers between periods due to the acquisition of Skynet in December 2021 and the acquisition of Next Level in February 2022. Our total number of customers increased from 2,612 for the nine months ended April 30, 2021, to 3,963 customers for the nine months ended April 30, 2022.
Cost of Services (exclusive of depreciation and amortization). The cost of services increased by $2,495,000, or 67%, from the nine months ended April 30, 2021, to the nine months ended April 30, 2022. The increase in cost of services is primarily attributed to the consolidation of various networks as part of the increase in total customers between periods due to the acquisition of Skynet in December 2021 and the acquisition of Next Level in February 2022. Our total number of customers increased from 2,612 for the nine months ended April 30, 2021, to 3,963 customers for the nine months ended April 30, 2022. However, our consolidated gross margin improved by $4,835,000 from the nine months ended April 30, 2021, to the nine months ended April 30, 2022.
Selling, General and Administrative (SG&A) Expenses (exclusive of legal and professional fees and stock compensation expense). SG&A expenses increased by $3,725,000, or 84%, from the nine months ended April 30, 2021, to the nine months ended April 30, 2022. The increase in SG&A is attributed to the acquisition of Skynet in December 2021 and the acquisition of Next Level in February 2022. As part of the consolidation, the Company absorbed all the employees responsible for service delivery, technical support, sales, customer service, and administration.
Stock Compensation expense. Stock compensation expense decreased by $483,000, from the nine months ended April 30, 2021, to the nine months ended April 30, 2022. The decrease between periods is attributed to the recognition during the nine months ended April 30, 2021, of stock option expense of $110,000, the recognition of $247,000 in stock compensation expense associated with the funding of the 401(K)-profit sharing plan, the recognition of $18,000 in stock compensation for stock issued in lieu of cash payments to an employee and the recognition of $183,000 in stock issued consultants for professional services. During the nine months ended April 30, 2022, the Company only recognized $70,000 in stock compensation expense for the amortization of stock options issued various employees, in addition the Company recognized $5,000 in stock option expense for the modification of stock options previously issued.
Legal and professional fees. Legal and professional fees increased by $1,788,000, from the nine months ended April 30, 2021, to the nine months ended April 30, 2022. The increase between periods is attributed to the recognition during the nine months ended April 30, 2022, of $1,788,260 in professional fees for the audits, quality of earnings and due diligence related to the acquisition of Skynet and Next Level.
Bad debt. Bad debt increased by $42,000, from the nine months ended April 30, 2021, to the nine months ended April 30, 2022. The increase is attributed to the recognition of $51,000 in bad debt for accounts deemed uncollectible during the period ended April 30, 2022.
Depreciation and amortization. Depreciation and amortization increased by $1,310,000, from the nine months ended April 30, 2021, to the nine months ended April 30, 2022. The increase is primarily attributed to the acquisition of Skynet and Next Level and related amortization of intangible assets for $915,000.
Operating loss. The Company reported an operating loss of $3,525,000 for the nine months ended April 30, 2022, compared to an operating loss of $1,978,000 for the nine months ended April 30, 2021. The increase in operating loss between periods is primarily due to the increase in cost of services of $2,495,000, increase in SG&A of $3,725,000, the increase in legal fees of $1,788,000, the increase in depreciation and amortization of $1,310,000 and the increase of $42,000 in bad debt. These increases were slightly offset by the decrease in stock compensation expense of $483,000 and the improvement in gross margin of $4,835,000.
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Gain (loss) on derivative instruments. Gain (loss) on derivative instruments improved by $18,695,000 from the nine months ended April 30, 2021, to the nine months ended April 30, 2022. We are required to re-measure all derivative instruments at the end of each reporting period and adjust those instruments to market, as a result of the re-measurement of all derivative instruments we recognized a gain or loss between periods.
Loss on extinguishment of debt. Loss on extinguishment of debt increased by $5,480,000 from the nine months ended April 30, 2021, to the nine months ended April 30, 2022. On December 20, 2021, the Company and our lender entered into an amendment to a Credit Agreement, as described in Note 6, in connection with the amendment, the Company recognized a loss on extinguishment of debt for the amendment fee of $1,419,000 and the debt discount associated with the note of $4,061,000 was also recognized as a loss on extinguishment of debt.
Gain (loss) on settlement of debt. Gain (loss) on settlement of debt decreased by $347,000 from the nine months ended April 30, 2021, to the nine months ended April 30, 2022. The Company determined that a previously accrued obligation was satisfied with our vendors and recognized a gain of $347,000 during the nine months ended April 30, 2021.
Income tax benefit (expense). During the nine months ended April 30, 2022, the Company recognized an income tax expense of $285,000. During the six months ended January 31, 2021, the Company recognized an income tax expense of $122,000.
Interest expense. Interest expense increased by $1,484,000 from the nine months ended April 30, 2021, to the nine months ended April 30, 2022. During the nine months ended April 30, 2022, the Company recognized non-cash interest / accretion expense of $1,694,000 related to the adjustment to the present value of various convertible notes and debt. Additionally, the Company recognized $1,675,000 in interest expense for cash interest payments on various promissory notes, accrual of $754,000 for interest expense for various promissory notes and $34,000 fair value of shares issued as well as $115,000 added to the principal balance of various promissory notes, all recognized as loss on debt extinguishment charged to interest expense as consideration for extension of the maturity dates. The Company also directly amortized $250,000 original issuance discount on a new promissory note as interest expense.
Net income (loss) including noncontrolling interest. Net loss including noncontrolling interest for the nine months ended April 30, 2022, was $6,018,000, an improvement in net loss of $9,674,000, as compared to a net loss for the nine months ended April 30, 2021, of $15,692,000. The increase in cost of services of $2,495,000, the increase in SG&A of $3,725,000, the increase of $1,788,000 in legal and professional fees, the increase of $42,000 in bad debt expense, the increase of $1,310,000 in depreciation and amortization expense and the increase of $5,480,000 in loss on extinguishment of debt. These increases were slightly offset by the decrease of $483,000 in stock compensation expense, the improvement of $18,695,000 in derivative loss, and the improvement of $4,835,000 in gross margin.
Net loss attributable to the noncontrolling interest. During the nine months ended April 30, 2022, and 2021, the consolidated entity recognized net (loss) in noncontrolling interest of $1,306,000 and $223,000, respectively. The noncontrolling interest is presented as a separate line item in the Company’s stockholders equity section of the balance sheet.
Net income (loss) attributable to Digerati’s shareholders. Net loss for the nine months ended April 30, 2022, was $4,712,000 compared to a net loss for the nine months ended April 30, 2021, of $15,469,000.
Deemed dividend on Series A Convertible Preferred Stock. Dividend declared on convertible preferred stock for the nine months ended April 30, 2022, and 2021, were $14,000 and $15,000, respectively.
Net income (loss) attributable to Digerati’s common shareholders. Net loss for the nine months ended April 30, 2022, was $4,726,000 compared to a net loss for the nine months ended April 30, 2021, of $15,484,000.
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Liquidity and Capital Resources
Cash Position: We had a consolidated cash balance of $2,384,000 as of April 30, 2022. Net cash consumed by operating activities during the nine months ended April 30, 2022 was approximately $1,741,000, primarily as a result of operating expenses, that included $75,000 in stock compensation and warrant expense, bad debt expense of $51,000, loss on extinguishment of debt of $5,480,000, amortization of debt discount of $1,943,000, gain on derivative liability of $7,835,000, depreciation and amortization expense of $2,514,000, shares issued for debt extension for $34,000, addition to principal for debt extension charged to interest expense for $155,000, increase in accrued expense of $1,003,000, increase in accounts payable of $1,385,000, increase in accounts receivable of $443,000, and decrease in deferred income of $22,000. Additionally, we had a decrease in prepaid expenses and other current assets of $96,000, increase in inventory of $10,000 and the increase in other assets of $23,000.
Cash used in investing activities during the nine months ended April 30, 2022, was $12,805,000, $193,000 was used for the purchase of VoIP equipment, $4,100,000 was used to acquire Skynet’s assets, $8,690,000 was used to acquire Next Level, and the Company received $178,000 from Nexogy as an adjustment consideration for payables from the acquisition.
Cash provided by financing activities during the nine months ended April 30, 2022, was $15,441,000. The Company secured $706,000 from convertible notes, net of issuance costs and discounts and secured $15,530,000 from debt financing, net of issuance costs and discounts. The Company made principal payments of $590,000 on related party notes, $175,000 in principal payments on convertible notes and $30,000 in principal payments on equipment financing. Overall, our net operating, investing, and financing activities during the nine months ended April 30, 2022, contributed approximately $895,000 of our available cash.
Digerati’s consolidated financial statements for the nine months ending April 30, 2022, have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. Since the Company’s inception in 1993, Digerati has incurred net losses and accumulated a deficit of approximately $110,092,000 and a working capital deficit of approximately $25,034,000 which raises doubt about Digerati’s ability to continue as a going concern.
We are currently taking initiatives to reduce our overall cash deficiencies on a monthly basis. During fiscal 2022 certain members of our management team will continue to receive a portion of their compensation in common stock to reduce the depletion of our available cash. To strengthen our business, we intend to adopt best practices from or recent acquisitions and invest in a marketing and sales strategy to grow our monthly recurring revenue; we anticipate utilizing our value-added resellers and channel partners to tap into new sources of revenue streams, we have also secured various agent agreements to accelerate revenue growth. In addition, we will continue to focus on selling a greater number of comprehensive services to our existing customer base. Further, in an effort to increase our revenues, we will continue to evaluate the acquisition of various assets with emphasis in VoIP Services and Cloud Communication Services. As a result, during the due diligence process we anticipate incurring significant legal and professional fees.
Management believes that available resources as of April 30, 2022, will not be sufficient to fund the Company’s operations, debt service and corporate expenses over the next 12 months. The Company’s ability to continue to meet its obligations and to achieve its business objectives is dependent upon, and other things, raising additional capital, issuing stock-based compensation to certain members of the executive management team in lieu of cash, or generating sufficient revenue in excess of costs. At such time as the Company requires additional funding, the Company will seek to secure such best-efforts funding from various possible sources, including equity or debt financing, sales of assets, or collaborative arrangements. If the Company raises additional capital through the issuance of equity securities or securities convertible into equity, stockholders will experience dilution, and such securities may have rights, preferences, or privileges senior to those of the holders of common stock or convertible senior notes. If the Company raises additional funds by issuing debt, the Company may be subject to limitations on its operations, through debt covenants or other restrictions. If the Company obtains additional funds through arrangements with collaborators or strategic partners, the Company may be required to relinquish its rights to certain technologies. There can be no assurance that the Company will be able to raise additional funds or raise them on acceptable terms. If the Company is unable to obtain financing on acceptable terms, it may be unable to execute its business plan, the Company could be required to curtail its operations, and the Company may not be able to pay off its obligations, if and when they come due.
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Our current cash expenses are expected to be approximately $700,000 per month, including wages, rent, utilities, corporate expenses, and legal professional fees associated with potential acquisitions. As described elsewhere herein, we are not generating sufficient cash from operations to pay for our corporate and ongoing operating expenses, or to pay our current liabilities. As of April 30, 2022, our total liabilities were approximately $65,654,000, which included $8,922,000 in derivative liabilities. We will continue to use our available cash on hand to cover our deficiencies in operating expenses.
We estimate that we need approximately $80,000 per month of additional working capital to fund our corporate expenses during Fiscal 2022.
We have been successful in raising debt capital and equity capital in the past and as described in Notes 6, 7, and 8 to our consolidated financial statements. We have financing efforts in place to continue to raise cash through debt and equity offerings. Although we have successfully completed financings and reduced expenses in the past, we cannot assure you that our plans to address these matters in the future will be successful.
Recent Developments Related to the Credit Agreement, A&R Term Loan A Note, and Term Loan C Note
As described in Note 13 to the financial statements under the heading Forbearance Agreement and Third Amendment to Credit Agreement, on June 13, 2022, the parties to the Joinder entered into a Forbearance Agreement and Third Amendment to Credit Agreement (“Forbearance Agreement”).
Prior to the Forbearance Agreement being signed, Post Road did not send a notice of default with regard to or accelerate the maturity of the loans issued pursuant to the Credit Agreement, A&R Term Loan A Note, and Term Loan C Note (collectively, the “PRG Loans”).
Pursuant to the Forbearance Agreement, Post Road agreed to forbear through the Forbearance Period (as defined below) from (i) exercising its rights and remedies with regard to the existing events of default and (ii) requiring compliance with the financial covenants set forth in Section 11.12 of the Credit Agreement (related to leverage, EBITDA, liquidity, capital expenditures, fixed charge coverage ratio, and churn). The “Forbearance Period” is from June 13, 2022, through the earlier of (a) August 8, 2022, (b) the date on which any other event of default not enumerated in the Forbearance Agreement occurs or is deemed to have occurred, or (c) the date of any failure by the Company to comply with any aspect of the Forbearance Agreement. The forbearance does not constitute a waiver of the defaults enumerated nor does it impair the ability of Post Road to exercise its rights and remedies after the expiration of the Forbearance Period.
The events of default related to financial covenants were failure to maintain a Senior Leverage Ratio (as defined in the Credit Agreement) of less than 4.05 to 1.00 and failure to comply with a Credit Agreement provision whereby the Loan Parties are not allowed to make annual Capital Expenditures (as defined in the Credit Agreement) greater than $379,190.
The events of default unrelated to financial covenants were the Loan Parties’ failure to: (a) deliver certain certificates, financial information and projections, lease, landlord, and control agreements, and evidence of a UCC-3 filing; (b) close or consolidate certain bank accounts; (c) provide ten (10) business days’ notice prior to the Company filing certain filings with the Securities and Exchange Commission (the “SEC”) and the Nevada Secretary of State; and (d) engage an industry consultant acceptable to the Agent to consult with the Loan Parties on integration strategy, future acquisitions, operating performance, and various business issues.
The Forbearance Agreement amends the Joinder to allow T3 Nevada to give the Agent draft copies of its 10-Ks and 10-Qs and 8-Ks for the Agent and its advisors review only five business days (10-Ks) or two business days (10-Qs and 8-Ks) in advance rather than ten business days in advance as originally required by the Joinder. T3 Nevada complied with this obligation with regard to this Quarterly Report on Form 10-Q.
The Company anticipates implementing remedies by July 31, 2022 to resolve the financial covenants breaches and the breaches regarding delivering a compliance certificate, financial projections, and a landlord agreement along with engaging an industry consultant. The Company and Post Road have agreed to work in good faith to adjust the financial covenants set forth in Section 11.12 of the Credit Agreement to include the financial impact of the acquisitions of Skynet’s assets and. and the acquisition of Next Level Internet, Inc. As of the date of this filing, the Company cannot predict the final outcome of the negotiations with Post Road.
The other non-financial events of default were covenants that were complied with, however, the compliance was not timely pursuant to the provisions of the Credit Agreement and Joinder. These events of default have not been waived by Post Road.
The PRG Loans are secured by a first-priority security interest in all of the assets of T3 Nevada and guaranteed by T3 Nevada’s subsidiaries. As a result, if Post Road accelerates the maturity of the PRG Loans due to existing or new events of default pursuant to the Credit Agreement, Post Road could foreclose on their security interest and liquidate some or all of these assets, which would harm our business, financial condition and results of operations and could require us to curtail or cease operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risks.
Not Applicable.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
In connection with the preparation of this quarterly report on Form 10-Q for the quarter ended April 30, 2022, our Principal Executive Officer (“PEO”) and Principal Financial Officer (“PFO”) evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our PEO and PFO concluded that our disclosure controls and procedures as of the end of the period covered by this report were not effective such that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our PEO and PFO, as appropriate to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
(b) Changes in Internal Controls over Financial Reporting
There were no changes in our internal control over financial reporting, as defined in Rule 13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, as there has been no implementation to date of processes and/or procedures to remedy internal control weaknesses and deficiencies.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On September 21, 2021, T3 Nevada, a subsidiary of the Company, entered into a settlement agreement with Carolina Financial Securities, LLC (“CFS”). Under the settlement agreement the parties agreed to resolve all issues and claims related to the lawsuit. Pursuant to the settlement agreement, T3 Nevada agreed to pay CFS a total of $300,000, payable as follows: $100,000 by October 15, 2021, and $200,000 payable in 15 monthly installments of $13,333.33 beginning November 15, 2021. On October 15, 2021, the Company submitted a payment of $100,000 and as of the date of this filing, the Company submitted five (5) monthly payment for $13,333.33 each.
Item 1A. Risk Factors.
Not Applicable
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Not Applicable
Item 3. Defaults Upon Senior Securities.
None
Item 4. Mine Safety Disclosures.
Not Applicable
Item 5. Other Information.
Forbearance Agreement
We are reporting the following information in lieu of reporting on a Current Report on Form 8-K under Item 1.01 Entry into a Material Definitive Agreement.
Item 1.01 Entry into a Material Definitive Agreement.
As disclosed in a Current Report on Form 8-K filed by the Company in November 2020, on November 17, 2020, T3 Nevada (the Company’s majority owned subsidiary), T3 Nevada’s subsidiaries (T3 Nevada and its subsidiaries, collectively, “the T3 Nevada Parties”) entered into a credit agreement (the “Credit Agreement”) with Post Road Administrative LLC (the “Agent”) and its affiliate Post Road Special Opportunity Fund II LLP (collectively, “Post Road”). The Company is a party to certain sections of the Credit Agreement. Pursuant to the Credit Agreement, Post Road was to provide T3 Nevada with a secured loan of up to $20,000,000.
As disclosed in a Current Report on Form 8-K filed in December 2021, on December 20, 2021, the parties to the Credit Agreement entered into an amendment to the Credit Agreement.
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As disclosed in a Current Report on Form 8-K filed in February 2022 (the “February 8-K”), on February 4, 2022, the parties to the Credit Agreement agreed that Post Road would lend a further $10 million to T3 Nevada pursuant to a Term Loan C Note. T3 Nevada received net proceeds of $9.75 million pursuant to the Term Loan C Note. T3 Nevada used such loan proceeds to acquire all of the equity interests in Next Level Internet, Inc. (“Next Level”) from its two owners.
As also disclosed in the February 8-K, in connection with the issuance of the Term Loan C Note, on February 4, 2022, the T3 Nevada parties to the Credit Agreement and Next Level (collectively, the “Loan Parties”) and Post Road entered into a Joinder and Second Amendment to Credit Agreement (the “Joinder”) whereby, among other terms, Next Level became a guarantor of T3’s obligations pursuant to the Credit Agreement and notes issued pursuant thereto.
On June 13, 2022, the parties to the Joinder entered into a Forbearance Agreement and Third Amendment to Credit Agreement (“Forbearance Agreement”).
The Forbearance Agreement was entered into because certain events of default related to both the Credit Agreement and the Joinder have occurred. The events of default related to financial covenants were failure to maintain a Senior Leverage Ratio (as defined in the Credit Agreement) of less than 4.05 to 1.00 and failure to comply with a Credit Agreement provision whereby the Loan Parties are not allowed to make annual Capital Expenditures (as defined in the Credit Agreement) greater than $379,190.
The events of default unrelated to financial covenants were the Loan Parties’ failure to: (a) deliver certain certificates, financial information and projections, lease, landlord, and control agreements, and evidence of a UCC-3 filing; (b) close or consolidate certain bank accounts; (c) provide ten (10) business days’ notice prior to the Company filing certain filings with the Securities and Exchange Commission (the “SEC”) and the Nevada Secretary of State; and (d) engage an industry consultant acceptable to the Agent to consult with the Loan Parties on integration strategy, future acquisitions, operating performance, and various business issues.
Pursuant to the Forbearance Agreement, Post Road agreed to forbear through the Forbearance Period (as defined below) from (i) exercising its rights and remedies with regard to the existing events of default and (ii) requiring compliance with the financial covenants set forth in Section 11.12 of the Credit Agreement (related to leverage, EBITDA, liquidity, capital expenditures, fixed charge coverage ratio, and churn). The “Forbearance Period” is from June 13, 2022 through the earlier of (a) August 8, 2022, (b) the date on which any other event of default not enumerated in the Forbearance Agreement occurs or is deemed to have occurred, or (c) the date of any failure of any Loan Party to comply with any aspect of the Forbearance Agreement. The forbearance does not constitute a waiver of the defaults enumerated nor does it impair the ability of Post Road to exercise its rights and remedies after the expiration of the Forbearance Period.
In addition to the forbearance, the Forbearance Agreement amends the Credit Agreement to clarify Section 10.15 with regard to the Company’s affirmative covenant to comply with its SEC reporting obligations. It also amends the Credit Agreement to clarify the provisions of the Section 10 (affirmative covenants) whose violation constitute an event of default. Finally, the Forbearance Agreement amends the Joinder to allow T3 Nevada to give the Agent draft copies of its 10-Ks and 10-Qs and 8-Ks for the Agent and its advisors review only five business days (10-Ks) or two business days (10-Qs and 8-Ks) in advance rather than ten business days in advance as originally required by the Joinder.
The Company anticipates implementing remedies by July 31, 2022 to resolve the financial covenants breaches and the breaches regarding delivering a compliance certificate, financial projections, and a landlord agreement along with engaging an industry consultant. The Company and Post Road have agreed to work in good faith to adjust the financial covenants set forth in Section 11.12 of the Credit Agreement to include the financial impact of the acquisitions of Skynet’s assets and. and the acquisition of Next Level Internet, Inc. As of the date of this filing, the Company cannot predict the final outcome of the negotiations with Post Road.
The other non-financial events of default were covenants that were complied with, however, the compliance was not timely pursuant to the provisions of the Credit Agreement and Joinder. These events of default have not been waived by Post Road.
The foregoing summary of the Forbearance Agreement contains only a brief description of the material terms of the Forbearance Agreement and such description is qualified in its entirety by reference to the full text of the Forbearance Agreement, filed herewith as Exhibit 10.3 and incorporated by reference herein.
Item 6. Exhibits
| Exhibit Number | Exhibit Title | |
| 3.1* | Certificate of Correction to the Series A Convertible Preferred Stock Certificate of Designation. | |
| 4.1^ | ||
| 4.2 | ||
| 4.3^ |
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| # | Certain schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company will furnish supplementally copies of omitted schedules and exhibits to the Securities and Exchange Commission or its staff upon its request. |
| ^ | Portions of this exhibit have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K because such information is (i) not material and (ii) would likely be competitively harmful if publicly disclosed. The Company will furnish supplementally an unredacted copy of such exhibit to the Securities and Exchange Commission or its staff upon its request. |
| * | Filed herewith |
| + | In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| DIGERATI TECHNOLOGIES, INC. | ||
Date: June 21, 2022 |
By: | /s/ Arthur L. Smith |
| Name: | Arthur L. Smith | |
| Title: | President and Chief Executive Officer | |
| (Duly Authorized Officer and Principal Executive Officer) | ||
Date: June 21, 2022 |
By: | /s/ Antonio Estrada Jr. |
| Name: | Antonio Estrada Jr. | |
| Title: | Chief Financial Officer | |
| (Duly Authorized Officer and Principal Financial Officer) | ||
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